As an engineer for the DRISKO Inc. mining company, you are analyzing the acquisition of a...
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As an engineer for the DRISKO Inc. mining company, you are analyzing the acquisition of a new wastewater treatment system whose capital cost is $950,000. The salvage value of this equipment is estimated at $ 290,000 at the end of its 3-year economic life. Using this equipment would result in savings of $ 560,000 per year and operating expenses of $ 175,000 per year. The purchase of this system gives rise to a linear depreciation (CCA), the half-year rule does not apply. In order to acquire this new system, the company plans to finance the purchase with a loan of $ 500,000 repayable over 3 years at an interest rate of 5%. You will find below, the financial amortization schedule for the proposed loan: N 0 $ 1 $ 2 $ 3 $ Payment Interest $ $ 183 604 $25 000 $ 183 604 $17 070 $ 183 604 $ 8 743 $ Capital $ 158 604 $ 166 534 $ 174 861 $ Balance 500 000 341 396 174 861 Knowing that this company is taxed at the rate of 28% per year, calculate the net present value (NPV) of the project considering a minimum acceptable rate of return (MARR) on equity of 16%? Note1: The free cash flow to equity year by year is required to develop your answer. You must include the impact of funding in the completion of your solution. As an engineer for the DRISKO Inc. mining company, you are analyzing the acquisition of a new wastewater treatment system whose capital cost is $950,000. The salvage value of this equipment is estimated at $ 290,000 at the end of its 3-year economic life. Using this equipment would result in savings of $ 560,000 per year and operating expenses of $ 175,000 per year. The purchase of this system gives rise to a linear depreciation (CCA), the half-year rule does not apply. In order to acquire this new system, the company plans to finance the purchase with a loan of $ 500,000 repayable over 3 years at an interest rate of 5%. You will find below, the financial amortization schedule for the proposed loan: N 0 $ 1 $ 2 $ 3 $ Payment Interest $ $ 183 604 $25 000 $ 183 604 $17 070 $ 183 604 $ 8 743 $ Capital $ 158 604 $ 166 534 $ 174 861 $ Balance 500 000 341 396 174 861 Knowing that this company is taxed at the rate of 28% per year, calculate the net present value (NPV) of the project considering a minimum acceptable rate of return (MARR) on equity of 16%? Note1: The free cash flow to equity year by year is required to develop your answer. You must include the impact of funding in the completion of your solution.
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To calculate the Net Present Value NPV of the project we need to calculate the Free Cas... View the full answer
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Auditing and Assurance services an integrated approach
ISBN: 978-0132575959
14th Edition
Authors: Alvin a. arens, Randal j. elder, Mark s. Beasley
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