MetalWorks Inc. is considering a purchase of a cost-cutting technology for its existing operations. COO narrowed her
Question:
MetalWorks Inc. is considering a purchase of a cost-cutting technology for its existing operations. COO narrowed her search to two options:
a) technology X can be purchased for $200,000 and can be used for the next 6 years producing net additions of $60,000/year to existing MW’s FCF;
b) technology Y can be purchased for $350,000, but it has useful life of 12 years and can generate extra FCF of $63,000/year. Both technologies will have zero residual values at the end of their respective useful lives.
MW’s WACC is 6%. Which projects would you recommend investing into:
a) assuming X can be replicated on similar terms;
b) assuming X can be replicated on approved terms (in 6 years it will cost cheaper at $140,000). Show all math to support your answer.m
Accounting Principles
ISBN: 978-0470533475
9th Edition
Authors: Jerry J. Weygandt, Paul D. Kimmel, Donald E. Kieso