Question 1 [26 marks]
A manufacturing company is considering replacing an old machine with a new one. The risk-free rate of return is given as 4% p.a. The yearly return for the share market is given as 12%. Suppose a listed company has a beta value of 0.75. The shareholders of the company cannot benefit from imputation credits. The old machine was purchased 5 years ago for $100,000 and is expected to have a useful life of 10 years and zero salvage value. If the company sold the old machine today, it would receive $40,000. The new machine will cost $75,000 and is expected to have a useful life of 5 years with zero salvage value. The old machine has maintenance costs of $10,000 per year whereas the new machine has maintenance costs of $1,000 per year. The new machine will also reduce the cost of defects from $5,000 per year to $1,000 per year. The company uses straight-line depreciation, and assumes a company tax rate of 30%.
- What is the investors? required rate of return for the company?s shares?
- If the company is either a taxation category 1 or a taxation category 2 company, to which taxation category does the company belong. Would capital budgeting for the company be performed on a before-tax or an after-tax basis?
- If the old machine were sold today identify the annual depreciation expense and the tax savings for the old machine.
- Calculate the initial outlay for the project.
- Calculate the annual depreciation expense for the new machine and determine the net cash flows for years 1-5 of the project.
- Discuss what the payback period identifies and therefore why it is readily used.
- Calculate the payback period. What are the weaknesses of the payback period method for evaluating projects?
- Calculate the net present value (NPV), profitability index (PI) and internal rate of return (IRR) of the project.
- Is the project an acceptable investment? Explain your answer.
This question was answered on: Jan 30, 2021
Buy this answer for only: $15
This attachment is locked
We have a ready expert answer for this paper which you can use for in-depth understanding, research editing or paraphrasing. You can buy it or order for a fresh, original and plagiarism-free solution (Deadline assured. Flexible pricing. TurnItIn Report provided)
Pay using PayPal (No PayPal account Required) or your credit card . All your purchases are securely protected by .
About this QuestionSTATUS
Jan 30, 2021EXPERT
GET INSTANT HELP/h4>
We have top-notch tutors who can do your essay/homework for you at a reasonable cost and then you can simply use that essay as a template to build your own arguments.
You can also use these solutions:
- As a reference for in-depth understanding of the subject.
- As a source of ideas / reasoning for your own research (if properly referenced)
- For editing and paraphrasing (check your institution's definition of plagiarism and recommended paraphrase).
NEW ASSIGNMENT HELP?
Order New Solution. Quick Turnaround
Click on the button below in order to Order for a New, Original and High-Quality Essay Solutions. New orders are original solutions and precise to your writing instruction requirements. Place a New Order using the button below.
WE GUARANTEE, THAT YOUR PAPER WILL BE WRITTEN FROM SCRATCH AND WITHIN A DEADLINE.