Shiloh Ltd is buying a piece of equipment for GH¢100,000. The company intends to finance the purchase using debt and equity. A loan (debt) of GH¢30,000 is to be sourced from GCB at an interest rate of 16% per annum. The remaining GH¢70,000 will be financed using equity. The firm is listed on the GSE with an equity beta of 2.5. The risk free rate of interest is 10% and the market risk premium is 10%%. The marginal tax rate of the firm is 25%. The equipment is expected to generate the following cash flows: Year Cash Flows (GH¢) 1 25,000 2 39,000 3 42,000 4 35,000 5 25,000 6 30,000 Required: Advise whether the company should buy the equipment or not using the NPV and profitability index Why would you prefer the NPV method to other methods of project evaluation?
Shiloh Ltd is buying a piece of equipment for GH¢100,000. The company intends to finance the purchase using debt and equity. A loan (debt) of GH¢30,000 is to be sourced from GCB at an interest rate of 16% per annum. The remaining GH¢70,000 will be financed using equity. The firm is listed on the GSE with an equity beta of 2.5. The risk free rate of interest is 10% and the market risk premium is 10%%. The marginal tax rate of the firm is 25%. The equipment is expected to generate the following cash flows: Year Cash Flows (GH¢) 1 25,000 2 39,000 3 42,000 4 35,000 5 25,000 6 30,000 Required: Advise whether the company should buy the equipment or not using the NPV and profitability index Why would you prefer the NPV method to other methods of project evaluation?
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
Related questions
Question
Shiloh Ltd is buying a piece of equipment for GH¢100,000. The company intends to finance the purchase using debt and equity. A loan (debt) of GH¢30,000 is to be sourced from GCB at an interest rate of 16% per annum. The remaining GH¢70,000 will be financed using equity. The firm is listed on the GSE with an equity beta of 2.5. The risk free rate of interest is 10% and the market risk premium is 10%%. The marginal tax rate of the firm is 25%. The equipment is expected to generate the following cash flows:
|
Year |
Cash Flows (GH¢) |
|
1 |
25,000 |
|
2 |
39,000 |
|
3 |
42,000 |
|
4 |
35,000 |
|
5 |
25,000 |
|
6 |
30,000 |
- Required:
- Advise whether the company should buy the equipment or not using the NPV and profitability index
- Why would you prefer the NPV method to other methods of project evaluation?
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 3 steps with 2 images
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education