(a) You are starting a gardening business, which will need a lawnmower on an ongoing basis. You are considering two models. Model 1 costs $2,500 and is expected to run for 6 years. Model 2 costs $3,100 and is expected to run for 9 years. The maintenance costs each year are $300 for Model 1 and $200 for Model 2. Assume that the cost of capital is 8 percent. Which model should you buy? (b) Green Products Ltd is considering a potential project involving an investment in equipment that costs $4,000,000, has a five-year life and is expected to sell for $400,000 at the end of its life. The equipment will be depreciated on a straight-line basis over five years to zero. Based on market research costs of $100,000 paid last month, the equipment will produce revenues of $1,400,000 each year for five years. Costs associated with the sales will be $500,000 per annum. Green Products Ltd is subject to a 30 percent tax rate and the company's cost of capital is 8 percent. i. ii. iii. iv. Estimate the project's FCFs What is the project's NPV and IRR? Should Green Products accept or reject the project? Why? What other considerations should be made regarding the project decision? (c) A company has $4 million of debt outstanding and $6 million of equity putstanding. The cost of debt is 6%, cost of equity is 12% and company tax rate is 30%. What is the weighted average cost of capital for this company?
(a) You are starting a gardening business, which will need a lawnmower on an ongoing basis. You are considering two models. Model 1 costs $2,500 and is expected to run for 6 years. Model 2 costs $3,100 and is expected to run for 9 years. The maintenance costs each year are $300 for Model 1 and $200 for Model 2. Assume that the cost of capital is 8 percent. Which model should you buy? (b) Green Products Ltd is considering a potential project involving an investment in equipment that costs $4,000,000, has a five-year life and is expected to sell for $400,000 at the end of its life. The equipment will be depreciated on a straight-line basis over five years to zero. Based on market research costs of $100,000 paid last month, the equipment will produce revenues of $1,400,000 each year for five years. Costs associated with the sales will be $500,000 per annum. Green Products Ltd is subject to a 30 percent tax rate and the company's cost of capital is 8 percent. i. ii. iii. iv. Estimate the project's FCFs What is the project's NPV and IRR? Should Green Products accept or reject the project? Why? What other considerations should be made regarding the project decision? (c) A company has $4 million of debt outstanding and $6 million of equity putstanding. The cost of debt is 6%, cost of equity is 12% and company tax rate is 30%. What is the weighted average cost of capital for this company?
Chapter11: Capital Budgeting Decisions
Section: Chapter Questions
Problem 5EA: If a garden center is considering the purchase of a new tractor with an initial investment cost of...
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Transcribed Image Text:(a) You are starting a gardening business, which will need a lawnmower on an
ongoing basis. You are considering two models. Model 1 costs $2,500 and is
expected to run for 6 years. Model 2 costs $3,100 and is expected to run for 9 years.
The maintenance costs each year are $300 for Model 1 and $200 for Model 2.
Assume that the cost of capital is 8 percent. Which model should you buy?
(b) Green Products Ltd is considering a potential project involving an investment in
equipment that costs $4,000,000, has a five-year life and is expected to sell for
$400,000 at the end of its life. The equipment will be depreciated on a straight-line
basis over five years to zero. Based on market research costs of $100,000 paid last
month, the equipment will produce revenues of $1,400,000 each year for five years.
Costs associated with the sales will be $500,000 per annum. Green Products Ltd is
subject to a 30 percent tax rate and the company's cost of capital is 8 percent.
i.
ii.
iii.
iv.
Estimate the project's FCFS
What is the project's NPV and IRR?
Should Green Products accept or reject the project? Why?
What other considerations should be made regarding the project
decision?
(c) A company has $4 million of debt outstanding and $6 million of equity
outstanding. The cost of debt is 6%, cost of equity is 12% and company tax rate is
30%. What is the weighted average cost of capital for this company?
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