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1: You are looking at investing in a project that will require the purchase of machinery that costs S15,000,000 and can be sold for $4,200,000

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1: You are looking at investing in a project that will require the purchase of machinery that costs S15,000,000 and can be sold for $4,200,000 in ten years. The old machinery can be resold today for $2,500,000 and could have been salvaged for $800,000 in ten years. The new project will increase revenues by $2,200,000 and expenses by $950,000 while incurring a $200,000 increase in net working capital that will be recovered at the end of the project. The equipment is in the 25% CCA bracket and the 35% tax bracket. The weighted average floatation costs required to fund the purchase are 7.5%. Assume M&M propositions 1 & 2 in case 2 (taxes but no bankruptcy risk) holds. Currently the firm is financed purely by equity. The covariance between the equity returns and those of the market is 0.001519 while the variance of the market returns is 0.001215. Currently risk free t-bills are yielding 2% while the expected return on the market is 12%. The EBIT of the firm is $3,200,000 and they plan on changing their capital structure by taking on $8,000,000 in debt in the form of ten year bonds with annual coupons and compounding The bonds are selling on the market at $1,067.10 and are pay a 9% coupon, with a $1,000 face value. Should you replace the machine? 1: You are looking at investing in a project that will require the purchase of machinery that costs S15,000,000 and can be sold for $4,200,000 in ten years. The old machinery can be resold today for $2,500,000 and could have been salvaged for $800,000 in ten years. The new project will increase revenues by $2,200,000 and expenses by $950,000 while incurring a $200,000 increase in net working capital that will be recovered at the end of the project. The equipment is in the 25% CCA bracket and the 35% tax bracket. The weighted average floatation costs required to fund the purchase are 7.5%. Assume M&M propositions 1 & 2 in case 2 (taxes but no bankruptcy risk) holds. Currently the firm is financed purely by equity. The covariance between the equity returns and those of the market is 0.001519 while the variance of the market returns is 0.001215. Currently risk free t-bills are yielding 2% while the expected return on the market is 12%. The EBIT of the firm is $3,200,000 and they plan on changing their capital structure by taking on $8,000,000 in debt in the form of ten year bonds with annual coupons and compounding The bonds are selling on the market at $1,067.10 and are pay a 9% coupon, with a $1,000 face value. Should you replace the machine

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