Company Shoe Plus considers selling the machines it bought 3 years ago for 600,000 and replace...
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Company Shoe Plus considers selling the machines it bought 3 years ago for €600,000 and replace them by new machines. The old machines have been depreciated linearly, 1 year of depreciation is left, and can be sold right now for €200,000. The new machine require an investment of €800,000 and will be depreciated linearly over 4 years. The firm expects that this machine can also be sold at €200,000 in year 4. As a result of this investment, the next 4 years an annual saving of €100,000 in wages and an annual saving of € 120,000 in energy costs can be realized. The annual maintenance costs will increase from €540,000 to €565,000 annually. The project will have no impact on the firm's assets is 1.2,the beta(unlevered) of the firm is 1.1 and the project's beta is 1.4. The project will be completely financed by equity. The risk free rate is 2% and the market risk premium is 6%. The company is profitable and the tax rate is 30%. A) Calculate the annul free cash flow. B) What is the appropriate discount rate for this project (explain briefly)? Company Shoe Plus considers selling the machines it bought 3 years ago for €600,000 and replace them by new machines. The old machines have been depreciated linearly, 1 year of depreciation is left, and can be sold right now for €200,000. The new machine require an investment of €800,000 and will be depreciated linearly over 4 years. The firm expects that this machine can also be sold at €200,000 in year 4. As a result of this investment, the next 4 years an annual saving of €100,000 in wages and an annual saving of € 120,000 in energy costs can be realized. The annual maintenance costs will increase from €540,000 to €565,000 annually. The project will have no impact on the firm's assets is 1.2,the beta(unlevered) of the firm is 1.1 and the project's beta is 1.4. The project will be completely financed by equity. The risk free rate is 2% and the market risk premium is 6%. The company is profitable and the tax rate is 30%. A) Calculate the annul free cash flow. B) What is the appropriate discount rate for this project (explain briefly)?
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A To calculate the annual free cash flow we need to consider the cash inflows and outflows associate... View the full answer
Related Book For
Principles Of Managerial Finance
ISBN: 978-0136119463
13th Edition
Authors: Lawrence J. Gitman, Chad J. Zutter
Posted Date:
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