1. A chemical plant is considering purchasing a computerized control system. The initial cost is $200,000, and the system will produce net savings of $100,000 per year. If purchased, the system will be depreciated under MACRS as a five-year recovery property. The system will be used for four years, at the end of which time the firm expects to sell it for $30,000. The firm's marginal tax rate on this investment is 28%. Any capital gains will be taxed at the same income tax rate. The firm is considering purchasing the computer control system either through its retained earnings or through borrowing from a local bank. Two commercial banks are willing to lend the $200,000 at an interest rate of 10%, but each requires different repayment plans (See Table below). Bank A requires four equal annual payments with interest calculated separately based on the unpaid balance prior to each payment. Bank B offers a traditional installment payment plan with five equal annual payments (interest + principal = equal payment). End of Year 1 234 Repayment Plan of Bank A Principal $50,000 $50,000 $50,000 $50,000 Interest $20,000 $15,000 $10,000 $5,000 Repayment Plan of Bank B End of Year Principal Interest Total $32,759 $20,000 $52,759 4 2345 $36,035 $16,724 $52,759 $39,638 $13,121 $52,759 $43,602 $9,157 $52,759 $47,963 $4,796 $52,759 a. Determine the cash flows inf the computer control system is to be bought through its retained earnings (100% equity financing) b. Determine the cash flows if the asset is financed entirely through Bank A (100% debt financing) C. Determine the cash flows if the asset is financed entirely through Bank B (100% debt financing)
1. A chemical plant is considering purchasing a computerized control system. The initial cost is $200,000, and the system will produce net savings of $100,000 per year. If purchased, the system will be depreciated under MACRS as a five-year recovery property. The system will be used for four years, at the end of which time the firm expects to sell it for $30,000. The firm's marginal tax rate on this investment is 28%. Any capital gains will be taxed at the same income tax rate. The firm is considering purchasing the computer control system either through its retained earnings or through borrowing from a local bank. Two commercial banks are willing to lend the $200,000 at an interest rate of 10%, but each requires different repayment plans (See Table below). Bank A requires four equal annual payments with interest calculated separately based on the unpaid balance prior to each payment. Bank B offers a traditional installment payment plan with five equal annual payments (interest + principal = equal payment). End of Year 1 234 Repayment Plan of Bank A Principal $50,000 $50,000 $50,000 $50,000 Interest $20,000 $15,000 $10,000 $5,000 Repayment Plan of Bank B End of Year Principal Interest Total $32,759 $20,000 $52,759 4 2345 $36,035 $16,724 $52,759 $39,638 $13,121 $52,759 $43,602 $9,157 $52,759 $47,963 $4,796 $52,759 a. Determine the cash flows inf the computer control system is to be bought through its retained earnings (100% equity financing) b. Determine the cash flows if the asset is financed entirely through Bank A (100% debt financing) C. Determine the cash flows if the asset is financed entirely through Bank B (100% debt financing)
Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Eugene F. Brigham, Phillip R. Daves
Chapter12: Capital Budgeting: Decision Criteria
Section: Chapter Questions
Problem 17P: The Perez Company has the opportunity to invest in one of two mutually exclusive machines that will...
Related questions
Question

Transcribed Image Text:1. A chemical plant is considering purchasing a computerized control system. The initial cost
is $200,000, and the system will produce net savings of $100,000 per year. If purchased, the
system will be depreciated under MACRS as a five-year recovery property. The system will
be used for four years, at the end of which time the firm expects to sell it for $30,000. The
firm's marginal tax rate on this investment is 28%. Any capital gains will be taxed at the
same income tax rate. The firm is considering purchasing the computer control system
either through its retained earnings or through borrowing from a local bank. Two
commercial banks are willing to lend the $200,000 at an interest rate of 10%, but each
requires different repayment plans (See Table below). Bank A requires four equal annual
payments with interest calculated separately based on the unpaid balance prior to each
payment. Bank B offers a traditional installment payment plan with five equal annual
payments (interest + principal = equal payment).
End of Year
1
234
Repayment Plan of Bank A
Principal
$50,000
$50,000
$50,000
$50,000
Interest
$20,000
$15,000
$10,000
$5,000
Repayment Plan of Bank B
End of Year
Principal
Interest
Total
$32,759
$20,000
$52,759
4
2345
$36,035
$16,724
$52,759
$39,638
$13,121
$52,759
$43,602
$9,157
$52,759
$47,963
$4,796
$52,759
a.
Determine the cash flows inf the computer control system is to be bought through its
retained earnings (100% equity financing)
b. Determine the cash flows if the asset is financed entirely through Bank A (100%
debt financing)
C.
Determine the cash flows if the asset is financed entirely through Bank B (100%
debt financing)
Expert Solution

This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 2 steps

Recommended textbooks for you

Intermediate Financial Management (MindTap Course…
Finance
ISBN:
9781337395083
Author:
Eugene F. Brigham, Phillip R. Daves
Publisher:
Cengage Learning

EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:
9781337514835
Author:
MOYER
Publisher:
CENGAGE LEARNING - CONSIGNMENT


Intermediate Financial Management (MindTap Course…
Finance
ISBN:
9781337395083
Author:
Eugene F. Brigham, Phillip R. Daves
Publisher:
Cengage Learning

EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:
9781337514835
Author:
MOYER
Publisher:
CENGAGE LEARNING - CONSIGNMENT


Cornerstones of Cost Management (Cornerstones Ser…
Accounting
ISBN:
9781305970663
Author:
Don R. Hansen, Maryanne M. Mowen
Publisher:
Cengage Learning