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 $120,000 per installation and will have an operating cost of $11,000 annually, the other system, the Colossus, will cost $225,000 per installation and has an annual operating cost of $6,000 per installation. Both systems will be depreciated straight line to zero over their working lives. The Titan will be replaced every 5 years and the Colossus will be replaced every 8 years. The company faces a tax rate of 30%. This is a normal project for the company, which has an asset beta of 0.9 and an equity beta of 1.0875. The company is 80% funded by equity and has just paid an annual dividend of 23.4 Cents and its share price is 260 Cents. The risk free rate of interest is 4.35% and the stock market risk premium is 5.5%. Ignore inflation Required: a. Calculate the cost of capital that would be used to evaluate this investment decision. (5 Marks) b. Work out the equivalent annual cost for each machine and explain which system you would choose (6 Marks) c. Book values or market values? Indicate which one is used in calculating the WACC and why it is that one and not the other one (6 Marks) (Total 25 Marks) 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 $120,000 per installation and will have an operating cost of $11,000 annually, the other system, the Colossus, will cost $225,000 per installation and has an annual operating cost of $6,000 per installation. Both systems will be depreciated straight line to zero over their working lives. The Titan will be replaced every 5 years and the Colossus will be replaced every 8 years. The company faces a tax rate of 30%. This is a normal project for the company, which has an asset beta of 0.9 and an equity beta of 1.0875. The company is 80% funded by equity and has just paid an annual dividend of 23.4 Cents and its share price is 260 Cents. The risk free rate of interest is 4.35% and the stock market risk premium is 5.5%. Ignore inflation Required: a. Calculate the cost of capital that would be used to evaluate this investment decision. (5 Marks) b. Work out the equivalent annual cost for each machine and explain which system you would choose (6 Marks) c. Book values or market values? Indicate which one is used in calculating the WACC and why it is that one and not the other one (6 Marks) (Total 25 Marks)