Question

here are two alternatives first is terminator system that costs 280000 it has a useful life of 9 years and a salvage value of 15000. the other alternative is skynet that costs 345000 and has a useful life of 9 years and a salvage value of 32000. the CCA rate is 20% and tax rate is 28%.

Both projects will require an additional working capital investment. For the Terminator System, net working capital will increase by $10,000 at time zero and increase by further $2,000 per year over the life of the project. The system's net working capital investment will be fully recovered at the end of the system's useful life. For the Skynet System, net working capital will increase by $20,000 at time zero and increase by further $4,000 per year over the life of the project. The entire net working capital investment will be fully recovered at the end of the system's useful life.

If the new automation process is put into use, the pre-tax cost savings each year are

estimated to be as follows. The estimated useful lifetime of the alternative systems are

nine years.

Figure 1: Estimated Pre-Tax Cost Savings

Year Terminator Skynet

1 $120,000 $135,000

2 $110,000 $125,000

3 $105,000 $115,000

4 $102,000 $112,000

5 $95,000 $106,000

6 $92,000 $102,000

7 $90,000 $98,000

8 $55,000 $95,000

9 $34,000 $86,000

Calculate the NPV of each alternative using the six steps of capital budgeting and the cost savings shown in Figure 1 above. Which alternative would you recommend? Be specific and provide an explanation for your answer

The company's weighted cost of capital must be updated. The company just paid its annual dividend of $4.50 per share. The common share currently sells for $48 per share. You estimate that the company dividend will grow steadily at 5% per year for the foreseeable future. The company has 1.5 million common shares outstanding. Howard currently has a bond issue outstanding with twelve years to maturity. The $25,000 face value bond offers a 4% semi-annual coupon. Bonds currently sell for 91.05751% of face value. The bond's yield to maturity will be used as the estimated before tax cost of debt for the company. Howard has 3,600 of the bonds outstanding.

Answer 1