CLASS / COURSE: Finance
1. For 5 years the XYZ pharmaceuticals has been using a machine that attaches labels to bottles. The machine was purchased for $4000 and being depreciated over 10 years to a zero salvage value using straight line method. The machine can be sold now for $2000. XYZ can buy a new machine for $6000 that have a useful life of 5 years and can the labor cost s by $1200 annually. The old machine will require a major overhaul in the next few months. The cost of the overhaul is expected to be $300. If purchased, the new machine can be depreciated over 5 years with a $500 salvage value using straight line method. The company will invest in any project earning more than 12% of the cost of capital. The tax rate is 40%. Should XYZ invest in the new machine?
2. The John Smith is a small businessman who has need for a pickup truck in his everyday work. He is considering buying a used truck for $3000. If he goes ahead, he believes that he will be able to sell it for $1000 at the end of 4 years, so he will depreciate the $2000 of the truck's value on a straight line basis. John can borrow the $3000 from a bank and repay four equal annual installments at 6% interest. However, a friend advises him that he may be better off to lease a truck if he can get the same terms from the leasing company that he receives at the bank. Assuming that this is so, should John buy or lease the truck? Tax rate is 40%.
3. A transportation authority asks you to check the feasibility of financing for a toll bridge. The bridge will cost $2000, 000. The authority can borrow this amount now and repay it from the tolls. It will take two years to construct and be open for the traffic at the end of year (EOY) 2. The tolls will be accumulated through the third year and will be available for the initial repayment at EOY 3. In subsequent years the tolls are deposited at the end of the year. Draw the cash flow diagram. How much must be charge to each car to repay the borrowed money in 20 equal annual installments (first installment due at EOY 3), with 8% compound interest on unpaid balance?
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SUBJECTS / CATEGORIES:
2. Financial Management
3. Corporate Finance