Question The Crammond Manufacturing Plc has a number of factories around the country and it needs to
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The Crammond Manufacturing Plc has a number of factories around the country and it needs to upgrade the water purification systems in its factories.
The company is looking at two possible systems: the first, the Titan, will cost K per installation and will have an operating cost of K annually; the other system, the Colossus, will cost K per installation and has an annual operating cost of K per installation. Both systems will be depreciated straight line to zero over their working lives. The Titan will be replaced every years and the Colossus will be replaced every years. The company faces a tax rate of This is a normal project for the company, which has an asset beta of and an equity beta of The company is funded by equity and has just paid an annual dividend of Ngwee and its share price is Ngwee. The risk free rate of interest is and the stock market risk premium is Ignore inflation.
Required:
a Calculate the cost of capital that would be used to evaluate this investment decision. Marks
b Work out the equivalent annual cost for each machine and explain which system you would choose. Marks
Related Book For
ISE International Business Competing In The Global Marketplace
ISBN: 9781260575866
13th International Edition
Authors: Charles Hill
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