A-5 (10 Marks)

a) (4 marks) Filkins Fabric Company has the opportunity to invest in one of two mutually exclusive knitting machines that will produce a product it will need for the foreseeable future.Machine A costs $190,000 and realizes after-tax inflows of $87,000 per year for 3 years. Machine B costs $360,000 and realizes after-tax inflows of $98,300 per year for 6 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 14%. (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 Britain is 4.4%, what must the six-month risk-free rate be in Canada? (***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.

1.2789 Cdn = 1 U.S. dollar

1.8295 Cdn = 1 British pound

0.4876 Cdn = 1 West German Mark

Required:

Use the above data to calculate the amount of British pounds, which can be acquired with 500,000 West German Marks.