CFIN -STUDENT EDITION-ACCESS >CUSTOM<
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ISBN: 9780357752951
Author: BESLEY
Publisher: CENGAGE C
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Chapter 10, Problem 5PROB
Summary Introduction
Cost of asset includes all the cost which incurs for acquiring the machine. Cost includes shipping and installation cost.
MACRS stands for modified accelerated cost recovery system. Life of the asset will be classified as per the internal revenue code.
Five years MACRS rates, Year 1: 20%, Year 2: 32%, Year 3: 19.20% and Year 4: 11.52%, Year 5: 11.52%, Year 6: 5.76%.
WT is considering purchase of an asset which cost $214,000 and required installation cost of $26,000. New machine falls under five years MACRS class.
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Scenario one: Under what circumstances would it be appropriate for a firm to use different cost of capital for its different operating divisions? If the overall firm WACC was used as the hurdle rate for all divisions, would the riskier division or the more conservative divisions tend to get most of the investment projects? Why? If you were to try to estimate the appropriate cost of capital for different divisions, what problems might you encounter? What are two techniques you could use to develop a rough estimate for each division’s cost of capital?
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