Question 2 Mad Cat Inc. is debating between two alternative earth moving machines to use for the next 8 years. The first supplier, Double Candle, offers the necessary machinery (CCA rate = 30%) at an upfront cost of $5,450,000. These machines are expected to last 4 years and then be salvaged for approximately $1,400,000 (the CCA pool remains open). All the Double Candle machines would be salvaged and replaced after 4 years. The alternative is to purchase significantly more expensive (but longer lasting) machinery from Elemental which would last the full 8 years but cost $8,650,000 and depreciate at the same CCA rate. Elemental's machines have an expected salvage value of approximately $1,800,000. Mad Cat pays a 25% tax rate and its cost of capital is 11%. a) Which of the two systems incurs the lowest overall cost for Mad Cat? (4 marks) b) For what salvage value on the Elemental machines would you be indifferent between the two options? (2 marks)

Question 2 Mad Cat Inc. is debating between two alternative earth moving machines to use for the next 8 years. The first supplier, Double Candle, offers the necessary machinery (CCA rate = 30%) at an upfront cost of $5,450,000. These machines are expected to last 4 years and then be salvaged for approximately $1,400,000 (the CCA pool remains open). All the Double Candle machines would be salvaged and replaced after 4 years. The alternative is to purchase significantly more expensive (but longer lasting) machinery from Elemental which would last the full 8 years but cost $8,650,000 and depreciate at the same CCA rate. Elemental's machines have an expected salvage value of approximately $1,800,000. Mad Cat pays a 25% tax rate and its cost of capital is 11%. a) Which of the two systems incurs the lowest overall cost for Mad Cat? (4 marks) b) For what salvage value on the Elemental machines would you be indifferent between the two options? (2 marks)

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Esquire Company needs to acquire a molding machine to be used in its manufacturing process. Two types of machines that would be appropriate are presently on the market. The company has determined the following: Machine A could be purchased for $11,000. It will last 10 years with annual maintenance costs of $400 per year. After 10 years the machine can be sold for $1,155. Machine B could be purchased for $10,000. It also will last 10 years and will require maintenance costs of $1,600 in year three, $2,000 in year six, and $2,400 in year eight. After 10 years, the machine will have no salvage value. Required: Assume an interest rate of 8% properly reflects the time value of money in this situation and that maintenance costs are paid at the end of each year. Ignore income tax considerations. Calculate the present value of Machine A & Machine B. Which machine Esquire should purchase
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The management of Ballard MicroBrew is considering the purchase of an automated bottling machinefor $120,000. The machine would replace an old piece of equipment that costs $30,000 per year to operate. The new machine would cost $12,000 per year to operate. The old machine currently in use couldbe sold now for a scrap value of $40,000. The new machine would have a useful life of 10 years with nosalvage value.Required:Compute the simple rate of return on the new automated bottling machine.
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