(4 marks) Contec Systems has the opportunity to invest in one of two mutually exclusive machines that will produce a product it will need for the foreseeable future. Machine A costs $2.5 million and realizes after-tax inflows of $900,000 per year for 5 years. Machine B costs $3.4 million and realizes after-tax inflows of $800,000 per year for 9 years. Assume that machine prices are not expected to rise because inflation will be offset by cheaper components used in the machines. The cost of capital is 12%. (Ignore CCA)

Required: What is the equivalent annual annuity for each machine? Which machine should be chosen?

b) (3 marks) Current exchange rates, 6 month forward exchange rates and risk free interest rates are as follows:

Spot Fwd Spot Fwd

Per C$ Per C$ Per US$ Per US$

Australian Dollars 1.23901 1.22891 1.48038 1.47065

British Pounds 0.535174 0.5456 0.639427 0.6495

Canadian Dollars 1.00 1.00 1.1948 1.2231

Euro 0.655924 0.64993 0.783699 0.7811

Suppose interest rate parity holds.

If the current six-month risk-free rate in the United States is 4.4%, what must the six-month risk-free rate be in Britain? (***Carry all decimal places for interim calculations, round final answers to 4 places.***)

Question A-5 continued

c) (3 marks) The following spot rates are expressed in Canadian currency.

1.08 Cdn = 1 U.S. dollar

1.45 Cdn = 1 Euro

2.13 Cdn = 1 British pound

Required:

Use the above data to calculate the amount in Euros, which can be acquired with 500,000 British pounds.