Question

Question 1 Plasma Ltd, makers of plasma televisions, is considering also making DVD players. They have...

Question 1 Plasma Ltd, makers of plasma televisions, is considering also making DVD players. They have the choice of two machines with which to make the DVD players, and both could do the job adequately. They have called upon you to assist them in deciding whether Machine A or Machine B should be purchased. Both machines are to be depreciated straight line down to a book value of zero over their entire useful life. Despite this, it is anticipated that Machine A will be sold for $8,000 and Machine B for $12,000 at the end of their useful lives. Details of each project’s cash flows are tabulated below: Machine A Machine B Cost $450,000 $624,000 Pre-Tax Net Annual Inflow (these cash flows occur at the end of the year) $160,000 $210,000 Machine Life 10 years 12 years In addition to the cash flow information, you have also been provided with the following details: • The corporate tax rate is 30%; • Tax is payable annually in arrears (ie tax is paid on profits one year after it is earned); • The project is in an industry which is 15% less risky than the industry in which the firm currently operates; • Plasma Ltd currently has a beta of 1.7; • The market risk premium is 10% p.a.; and, • The expected return on the market is 18% p.a. Given this information, which machine, if any, do you recommend Plasma Ltd purchase? In providing your answer, explain why you have made your recommendation.

Homework Answers

Answer #1

Beta of the project = 1.7*(1-15%) = 1.445

Required retrun = Rf + Beta*(Rm-Rf)

=8%+1.445*10%

=22.5%

as machine B is having higher net present value, Machine B should be choosed calculation is given below:-

Formulas USed:-

Particular Machine A Machine B
Initial Cost 450000 624000
Salvage value 8000 12000
Depriciation =B4/10 =C4/12
Pre-tax CashFlow 160000 210000
cashflow after Tax =(B7-B6)*(1-$B$2)+B6 =(C7-C6)*(1-$B$2)+C6
NPV =PV($B$1,10,-B8,-B5)-B4 =PV($B$1,12,-C8,-C5)-C4

I hope my efforts will be fruitful to you.

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Smith Electronics Ltd. (Smith) manufactures portable CD and DVD players for a well-known international distributer. As...
Smith Electronics Ltd. (Smith) manufactures portable CD and DVD players for a well-known international distributer. As the chief financial officer for Smith, you are currently evaluating a major expansion plan. While the plan itself is likely to have a much longer term impact on the firm’s profitability, Smith has always taken a relatively risk-averse view to capital expenditures and has used a four-year planning horizon, which it will do again in this instance. The project will require an investment of...
A manufacturer is considering two alternative machine replacements. Machine 1 costs $1 million with an expected...
A manufacturer is considering two alternative machine replacements. Machine 1 costs $1 million with an expected life of 5-years and will generate after-tax cash flows of $350,000 a year. At the end of 5 years, the salvage value on Machine 1 is zero, but the company will be able to purchase another Machine 1 for a cost of $1.2 million. The replacement Machine 1 will generate after-tax cash flows of $375,000 a year for another 5 years. At that time...
1. Anyidado Ltd. is considering a new project that complements its existing business. The machine required...
1. Anyidado Ltd. is considering a new project that complements its existing business. The machine required for the project costs GHS3.4 million. The marketing department predicts that sales related to the project will be GHS1.9 million per year for the next four years, after which the market will cease to exist. The machine will be depreciated down to zero over its four-year economic life using the straight-line method. Cost of goods sold and operating expenses related to the project are...
HEALTHY OPTIONS INC. Healthy Options is a Pharmaceutical Company which is considering investing in a new...
HEALTHY OPTIONS INC. Healthy Options is a Pharmaceutical Company which is considering investing in a new production line of portable electrocardiogram (ECG) machines for its clients who suffer from cardiovascular diseases. The company has to invest in equipment which costs $2,500,000 and falls within a MARCS depreciation of 5 years, and is expected to have a scrap value of $200,000 at the end of the project. Other than the equipment, the company needs to increase its cash and cash equivalents...
Question 1 30 marks You are the manager of Compounders Ltd. The company mixes compound for...
Question 1 30 marks You are the manager of Compounders Ltd. The company mixes compound for smaller plastic extrusion companies. Compounders Ltd has six (6) mixing machines with a maximum capacity (100%) of 250 ton per month. However, due to power cuts, the machines are currently being operated at 75% of installed capacity. One (1) ton of a compound mixture consists of two (2) raw materials: 0.7 ton of Electrolyte and 0.3 ton of Copper Wire. Assume no wastage. There...
Distance Trucking is considering replacing an existing semi-trailer truck with a more modern long-haul vehicle. The...
Distance Trucking is considering replacing an existing semi-trailer truck with a more modern long-haul vehicle. The existing truck was purchased 5 years ago at a cost of $180,000 and is being depreciated over its useful life of 10 years at which point it is estimated to have a residual trade in value of $30,000. The existing truck has 5 years of usable life remaining and can currently be sold for $70,000 net. The new long-haul truck being considered will cost...
Please show the formula from excel if you can. Thanks Question 1 : A company has...
Please show the formula from excel if you can. Thanks Question 1 : A company has the opportunity to expand its business operations by acquiring new plant and equipment. The plant and equipment will cost $80,000 and have a useful life of 6 years. At the end of the period the plant and equipment will have a salvage value of $10,000. The Tax Office allows the company to depreciate this equipment at 25% per annum using the prime cost method...
11-4. Fruity Fruits Ltd. currently sells $25 million annually of apple juice in 1 litre containers...
11-4. Fruity Fruits Ltd. currently sells $25 million annually of apple juice in 1 litre containers and $10 million of individually packaged dried fruit snacks. The company wants to introduce a 230 mL single-serving cranberry–apple juice product next year. A $200,000 feasibility study just completed estimated yearly sales of $12 million for the new juice. The study also forecast that sales of the company's existing apple juice would fall by $2 million as some existing customers would switch to the...
As the newly appointed financial analyst for Coverdale Office Machines Ltd., you have been asked to...
As the newly appointed financial analyst for Coverdale Office Machines Ltd., you have been asked to evaluate two alternative capital investment opportunities. The company’s corporate income tax rate is 24%. First, you must re-calculate the company’s cost of capital. The company recently paid its annual dividend of $2.75 per common share. According to your calculations, the company’s beta is 0.80. The company’s common shares currently trade for $25.80 each on the TSX. The market return is estimated at 16% and...
Section 2 - CASE ANALYSIS (30 marks) INSTRUCTIONS: 1. Read the case below carefully and answer...
Section 2 - CASE ANALYSIS INSTRUCTIONS: 1. Read the case below carefully and answer ALL the questions which follow. 2. Your answers may be entered using a Microsoft Excel spreadsheet OR may be entered in a table format using Microsoft Word. HEALTHY OPTIONS INC. Healthy Options is a Pharmaceutical Company which is considering investing in a new production line of portable electrocardiogram (ECG) machines for its clients who suffer from cardiovascular diseases. The company has to invest in equipment which...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT