Micro-Technologies is a Bio Tech research firm that is conducting research on a cure for Aids. Their sole current source of revenues is from the sale of research data that they have collected about the virus (Ultimately, they are hoping to find an Aids vaccine that will be worth billions, the research data they are selling is only being to finance continuing research). The firm is considering the purchase of an electron microscope that will cost $2,000,000, and have a useful life of five years. At the end of the five years, the microscope will have an estimated salvage value of $500,000. If the firm purchases the scope, there will also be an associated maintenance cost of $50,000 per year. One possible alternative is to lease the equipment for the same period of time for $375,000 per year, with all maintenance assumed by the lessor. For simplicity, treat lease payments as if due at the end of the year. If the before project EBIT is $500,000 per year, the borrowing rate (before-tax is 12%), and the tax rate is 30%, what should the firm do?
Net Present Value
Net present value is the most important concept of finance. It is used to evaluate the investment and financing decisions that involve cash flows occurring over multiple periods. The difference between the present value of cash inflow and cash outflow is termed as net present value (NPV). It is used for capital budgeting and investment planning. It is also used to compare similar investment alternatives.
Investment Decision
The term investment refers to allocating money with the intention of getting positive returns in the future period. For example, an asset would be acquired with the motive of generating income by selling the asset when there is a price increase.
Factors That Complicate Capital Investment Analysis
Capital investment analysis is a way of the budgeting process that companies and the government use to evaluate the profitability of the investment that has been done for the long term. This can include the evaluation of fixed assets such as machinery, equipment, etc.
Capital Budgeting
Capital budgeting is a decision-making process whereby long-term investments is evaluated and selected based on whether such investment is worth pursuing in future or not. It plays an important role in financial decision-making as it impacts the profitability of the business in the long term. The benefits of capital budgeting may be in the form of increased revenue or reduction in cost. The capital budgeting decisions include replacing or rebuilding of the fixed assets, addition of an asset. These long-term investment decisions involve a large number of funds and are irreversible because the market for the second-hand asset may be difficult to find and will have an effect over long-time spam. A right decision can yield favorable returns on the other hand a wrong decision may have an effect on the sustainability of the firm. Capital budgeting helps businesses to understand risks that are involved in undertaking capital investment. It also enables them to choose the option which generates the best return by applying the various capital budgeting techniques.
Micro-Technologies is a Bio Tech research firm that is conducting research on a cure
for Aids. Their sole current source of revenues is from the sale of research data that they
have collected about the virus (Ultimately, they are hoping to find an Aids vaccine that
will be worth billions, the research data they are selling is only being to finance
continuing research). The firm is considering the purchase of an electron microscope that
will cost $2,000,000, and have a useful life of five years. At the end of the five years, the
microscope will have an estimated salvage value of $500,000. If the firm purchases the
scope, there will also be an associated maintenance cost of $50,000 per year. One
possible alternative is to lease the equipment for the same period of time for $375,000 per
year, with all maintenance assumed by the lessor. For simplicity, treat lease payments as
if due at the end of the year.
If the before project EBIT is $500,000 per year, the borrowing rate (before-tax is
12%), and the tax rate is 30%, what should the firm do?
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