Question
Footer Inc: Replacing the broken Machine Footer Inc, a manufacturer of T-shirts, had seen its production line slow to a halt when one of the
Footer Inc: Replacing the broken Machine
Footer Inc, a manufacturer of T-shirts, had seen its production line slow to a halt when one of the companys twomachines had broken down. If capacity increased, estimated sales revenues would rise by at least $50,000 per month due to unmet demand and increased efficiency. COGS on the additional revenues were expected to be 65% monthly. The companys management, saw 2 viable options to increase capacity:
OPTION 1: PURCHASE A NEW MACHINE
The cost of the new machine would be $142,000. Also there would be operating costs of $140,000 per year. These include $20.000 depreciation. After five years, the machine would have a salvage value of $40,000. Cost of capital is 6%.
OPTION 2: PURCHASE A SECOND HAND MACHINE
The company selling the machine also offers second hands machines. The cost of a second hand machine would be $60,000. Useful life three years. After three years the machine would have a salvage value of $40.000. The operating costs and cost of capital are the same as option 1.
REQUIRED
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Use NPV and PP calculations to analyze each option. (start with identifying the cash inflows and cash outflows). USE THE XL-SHEET
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Make a well-reasoned recommendation for the companys management backed up by your analysis. c.a. 100 words TYPE YOUR ANSWER IN THE XL SHEET
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After acquiring the machine, Footer Inc decided to grow its business and open an additional plant. In order to finance this, the company issued 4 million ordinary shares at market value $1,0 and took a bank loan of $2 million at an interest rate of 10%. The required rate of return by investors is 15%. Tax rate is 30%. Calculate the WACC. TYPE YOUR ANSWER IN THE XL SHEET
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Upload an Excel spreadsheet OR use the indirect method showing the cash flows of the investment for the $400.000 investment.
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Estimate/calculate the overall rate of return (WACC) for the $ 400.000 investment based on your personal assumptions. How are you going to finance this investment?
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