Principles of Corporate Finance
13th Edition
ISBN: 9781260465099
Author: BREALEY, Richard
Publisher: MCGRAW-HILL HIGHER EDUCATION
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Chapter 5, Problem 12PS
Summary Introduction
To determine: The cost of capital at which the company should work the extra shift using
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Tripple A Manufacturing needs to acquire a piece of equipment which will cost the company $80,000. It is estimated that in six years’ time the equipment can be salvaged for $20,000. The company’s bank has agreed to advance funds for the entire purchase price at 8 percent per annum payable in equal installments over the six years. Alternatively, the machine could be leased over the six years from the manufacturer, by way of an operating lease with annual lease payments of $14,000. Triple A’s tax rate is 40 percent and its cost of capital is 15 percent. The equipment has a CCA rate of 20 percent. If the machine is owned, annual maintenance costs will be $500.
Required: Advise Triple A which alternative they should choose, providing them with calculations to support your recommendation.
NOTE: PLEASE DONOT SOLVE IN EXCEL
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The Titanic Shipbuilding Company has a noncancelable contract to build a small cargo vessel. Construction involves a cash outlay of
$271,000 at the end of each of the next two years. At the end of the third year the company will receive payment of $645,000.
Assume the IRR of this option exceeds the cost of capital.
The company can speed up construction by working an extra shift. In this case there will be a cash outlay of $585,000 at the end of
the first year followed by a cash payment of $645,000 at the end of the second year. Use the IRR rule to show the (approximate) range
of opportunity costs of capital at which the company should work the extra shift. (Enter your answers as a percent rounded to 2
decimal places. Enter the smallest percent first.)
The company should work the extra shift if the cost of capital is between
% and
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A firm enters into an 8-year contract for materials that cost $90,000 initially and $30,000/yr beginning at the end of the 4th year. The company decides to make a lump sum payment at the end of year 2 to pay off the remainder of the contract. What lump sum is necessary at 8% interest?
Chapter 5 Solutions
Principles of Corporate Finance
Ch. 5 - (IRR) Check the IRRs for project F in Section 5-3.Ch. 5 - (IRR) What is the IRR of a project with the...Ch. 5 - (XIRR) What is the IRR of a project with the...Ch. 5 - Payback a. What is the payback period on each of...Ch. 5 - Payback Consider the following projects: a. If the...Ch. 5 - Prob. 3PSCh. 5 - IRR Write down the equation defining a projects...Ch. 5 - Prob. 5PSCh. 5 - IRR Calculate the IRR (or IRRs) for the following...Ch. 5 - IRR rule You have the chance to participate in a...
Ch. 5 - IRR rule Consider a project with the following...Ch. 5 - IRR rule Consider projects Alpha and Beta: The...Ch. 5 - IRR rule Consider the following two mutually...Ch. 5 - IRR rule Mr. Cyrus Clops, the president of Giant...Ch. 5 - Prob. 12PSCh. 5 - Investment criteria Consider the following two...Ch. 5 - Profitability index Look again at projects D and E...Ch. 5 - Capital rationing Suppose you have the following...Ch. 5 - Prob. 17PSCh. 5 - Prob. 18PS
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