Rem Starr, managing director of Irmo Manufacturing, is evaluating the viability of installing a new machine...

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Rem Starr, managing director of Irmo Manufacturing, is evaluating the viability of installing a new machine to expand operations. The machine under consideration costs $200,000. It is anticipated the new machine will increase earnings before interest and taxes of $50,000 per year. To operate the machine staff will have to undergo a brief training which will cost $5,000 after tax. Additionally, installation cost will be $5,000 after tax. It is expected that inventory will increase by $20,000 as a result of increased production. The machine will be depreciated on a straight-line basis over its useful life of 10 years and have no salvage value. Rem Starr expects to borrow $100,000 at 8% interest from A Bank resulting in yearly payments of $8,000 and a final payment of $100,000 in year 10. The company is taxed at the rate of 30% and has a required rate of return of 10% REQUIRED: Rem has asked you to: (i) (ii) Calculate the initial outlay associated with the project. Calculate the annual after-tax cash flows associated with the project over years 1 -9. Calculate the after-tax terminal cash flow in year 10. (iv) Calculate the net present value of the project. QUESTION FOUR (a) Tyrrell of Bimbourie's cost of ordinary shares is 16 per cent, it's before-tax cost of debt is 13 per cent and its tax rate is 40 per cent. Tyrrell's stock is currently selling at book value. REQUIRED: Using the following balance sheet, calculate Tyrrell's weighted average cost of capital. ASSETS LIABILITIES & EQUITY Cash $ 120 Accounts receivable 240 Inventories 360 Plant & equipment 2,160 $ 1,152 1,728 TOTAL ASSETS $2,880 TOTAL LIABILITIES & EQUITY $ 2,880 Long-term debt Common equity Rem Starr, managing director of Irmo Manufacturing, is evaluating the viability of installing a new machine to expand operations. The machine under consideration costs $200,000. It is anticipated the new machine will increase earnings before interest and taxes of $50,000 per year. To operate the machine staff will have to undergo a brief training which will cost $5,000 after tax. Additionally, installation cost will be $5,000 after tax. It is expected that inventory will increase by $20,000 as a result of increased production. The machine will be depreciated on a straight-line basis over its useful life of 10 years and have no salvage value. Rem Starr expects to borrow $100,000 at 8% interest from A Bank resulting in yearly payments of $8,000 and a final payment of $100,000 in year 10. The company is taxed at the rate of 30% and has a required rate of return of 10% REQUIRED: Rem has asked you to: (i) (ii) Calculate the initial outlay associated with the project. Calculate the annual after-tax cash flows associated with the project over years 1 -9. Calculate the after-tax terminal cash flow in year 10. (iv) Calculate the net present value of the project. QUESTION FOUR (a) Tyrrell of Bimbourie's cost of ordinary shares is 16 per cent, it's before-tax cost of debt is 13 per cent and its tax rate is 40 per cent. Tyrrell's stock is currently selling at book value. REQUIRED: Using the following balance sheet, calculate Tyrrell's weighted average cost of capital. ASSETS LIABILITIES & EQUITY Cash $ 120 Accounts receivable 240 Inventories 360 Plant & equipment 2,160 $ 1,152 1,728 TOTAL ASSETS $2,880 TOTAL LIABILITIES & EQUITY $ 2,880 Long-term debt Common equity

Answer rating: 100% (QA)

1 Initial outlay Machine cost 200000 Installation cost aftertax 5000 Training cost aftertax 5000 Loa... View the full answer