Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Gavin Mills has an existing facility that it paid 24,000,000 for 10 years ago. It has 3 choices for this facility now: sell it outright

Gavin Mills has an existing facility that it paid 24,000,000 for 10 years ago. It has 3 choices for this facility now: sell it outright for 9.5M today, lease it for the next 4 years to a supplier, then sell it at the end of the last year of the lease for 5M, or use it to produce flax seed for 4 years, then sell it at the end of the last year of production for 6M, but it will have to be upgraded (today) for use at a cost of 1.5M (not paid under the lease option). If it is used by Gavin to produce flax seed it can be sold for $42 a bushel with a contribution margin ratio (how much the firm keeps after variable costs of production) of 25%. To operate the plant, Gavin will incur $200,000 per year of fixed costs, regardless of production levels (not applicable to the lease). Gavin forecasts that it will sell the following bushels in each of the next 4 years: 200,000, 300,000, 400,000, 100,000. The lease terms would be $2M per year plus a $200,000 per year reduction in costs for the supplies Gavin buys from the leasee. Please use a WACC of 12%.

How much would the salvage value (sale price at the end of the lease) have to be to change the decision? Please consider changes in $100,000 increments (i.e. 5.2M to 5.1M) and enter your response in millions with no units and ONE decimal place: "$5,100,000" would be "5.1".

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

The Millionaire Next Door The Surprising Secrets Of Americas Wealthy

Authors: Thomas J. Stanley, William D. Danko

1st Edition

1589795474, 978-1589795471

More Books

Students also viewed these Finance questions