Question

Maple Leafs Sports & Entertainment is considering purchasing one of the following two pieces of lighting...

Maple Leafs Sports & Entertainment is considering purchasing one of the following two pieces of lighting equipment. Equipment A has a purchase price of $10 million and will cost, $240,000 pre-tax, to operate on an annual basis. This equipment will have to be replaced every 5 years and has a salvage value of $1 million. Equipment B on the other hand, has an initial cost of $14 million and costs $210,000 pre-tax, annually to operate. This equipment has a useful life of 7 years with a salvage value of $1.2 million. Both equipment sets are in an asset class with a CCA Rate of 30% and are otherwise identical. The income tax rate is 40 percent and the appropriate discount rate is 10%. Which equipment should the company purchase and why?

Homework Answers

Answer #1

1. calculation of total cash outflow in equipment A

depreciation = 10 m/n - 1 m/n

5 years

depreciation = 1.8 m/n p.a

total cost of operating = 0.24 m/n per year

thus, total cash outflow = 2.04 m/n

less : tax @ 40 % = (0.82 m/n)

total outflow after tax = 1.22 m/n

Therefore, the discounted cash outflow will be $ 0.32 m/n p.a

2. Calculation of cash outflow in Equipment B

calculation of depreciation = 14 m/n - 1.2 m/n

   7 years

depreciation = 1.83 m/n p.a

+ othercost = .0.21 m/n p.a

  total pretax outflow = 2.04 m/n

less : tax = 0.82 m/n

outflow after tax = 1.22 m/n

therefore, the discounted cashflow will be $ 0.25 m/n

hence, it is advisable to purchase equipment B as it is having lower cash outflow as compared to equipment A

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
The Tempo Golf and Country Club in London, Ontario, is evaluating two different irrigation system options....
The Tempo Golf and Country Club in London, Ontario, is evaluating two different irrigation system options. An underground automatic irrigation system will cost $9.2 million to install and $81,300 pre-tax annually to operate. It will not have to be replaced for 20 years. An aboveground system will cost $6.8 million to install, but $203,000 per year to operate. The aboveground equipment has an effective operating life of nine years. The country club leases its land from the city and both...
A company is purchasing a new equipment in Class 8 (20% CCA rate -- declining balance...
A company is purchasing a new equipment in Class 8 (20% CCA rate -- declining balance class, half year rule applicable) in 2019 for $30,000. The machine is expected to result in annual revenue of $14,000 for each of the next five years and will be sold at the end of that time for an expected salvage value of $12,000. Maintenance expenses are expected to be $1,400 for the first year and to increase by $200 per year for each...
Evaluate each of the following statements (TRUE/FALSE) and provide a one-two sentence(s) long explanation for your...
Evaluate each of the following statements (TRUE/FALSE) and provide a one-two sentence(s) long explanation for your answer (graphs, charts, formulas, and short calculations can be used as an explanation, too). Keep in mind that a statement is false if there is at least one case when the argument does not hold. To receive full credit for each statement, both the answer and the explanation must be correct. A firm has purchased a new piece of equipment for $420,000. The equipment...
Daily Enterprises is purchasing a $ 10.4$10.4 million machine. It will cost $ 53 comma 000$53,000...
Daily Enterprises is purchasing a $ 10.4$10.4 million machine. It will cost $ 53 comma 000$53,000 to transport and install the machine. The machine has a depreciable life of five years and will have no salvage value. Assume that CCA deductions are the same as depreciation expenses. The machine will generate incremental revenues of $ 3.8$3.8 million per year along with incremental costs of $ 1.5$1.5 million per year. If​ Daily's marginal tax rate is 35 %35%​, what are the...
Suppose Proctor? & Gamble? (P&G) is considering purchasing $15 million in new manufacturing equipment. If it...
Suppose Proctor? & Gamble? (P&G) is considering purchasing $15 million in new manufacturing equipment. If it purchases the? equipment, it will depreciate it for tax purposes on a? straight-line basis over five? years, after which the equipment will be worthless. It will also be responsible for maintenance expenses of $1.00 million per?year, paid in each of years 1 through 5. It can also lease the equipment under a true tax lease for $3.9 million per year for the five? years,...
Olympic Sports has two issues of debt outstanding. One is an 8% coupon bond with a...
Olympic Sports has two issues of debt outstanding. One is an 8% coupon bond with a face value of $36 million, a maturity of 15 years, and a yield to maturity of 9%. The coupons are paid annually. The other bond issue has a maturity of 20 years, with coupons also paid annually, and a coupon rate of 9%. The face value of the issue is $41 million, and the issue sells for 95% of par value. The firm's tax...
Suppose Procter and Gamble​ (P&G) is considering purchasing $ 11 million in new manufacturing equipment. If...
Suppose Procter and Gamble​ (P&G) is considering purchasing $ 11 million in new manufacturing equipment. If it purchases the​ equipment, it will depreciate it on a​ straight-line basis over the five​ years, after which the equipment will be worthless. It will also be responsible for maintenance expenses of $ 1.50 million per year.​ Alternatively, it can lease the equipment for  $ 2.5 million per year for the five​ years, in which case the lessor will provide necessary maintenance. Assume​ P&G?s...
Olympic Sports has two issues of debt outstanding. One is a 7% coupon bond with a...
Olympic Sports has two issues of debt outstanding. One is a 7% coupon bond with a face value of $37 million, a maturity of 10 years, and a yield to maturity of 8%. The coupons are paid annually. The other bond issue has a maturity of 15 years, with coupons also paid annually, and a coupon rate of 8%. The face value of the issue is $42 million, and the issue sells for 96% of par value. The firm's tax...
Green House Tomato Company is considering the purchase of new processing equipment for $1,500,000, with an...
Green House Tomato Company is considering the purchase of new processing equipment for $1,500,000, with an additional installation cost of $18,000. The new equipment will result in earnings before interest and taxes of $450,000 per year, and to operate the equipment properly, workers would have to go through an initial training session costing the company $50,000. In addition, because the equipment is extremely efficient, its purchase necessitates an increase in inventory of $90,000. Assume the company uses straight-line depreciation, the...
Trist Inc. is considering the purchase of a new loom to replace a less efficient one....
Trist Inc. is considering the purchase of a new loom to replace a less efficient one. The new machine will cost $240,000 including installation. The machine being replaced was purchased 5 years ago for $150,000 and is being depreciated as a 7-year MACRS property. It can be sold for $40,000. Compute the NINV for this project if Trist has a marginal tax rate of 35%. (Note: requires MACRS depreciation rates from the textbook)                          a. $225,000             b. $202,287             c. $239,000...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT