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%. What would the CMR have to increase to in order to change the decision?

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

Students also viewed these Finance questions

Question

Verify that U2AB also equals i=1 j=1 IA ijk

Answered: 1 week ago

Question

3. Identify drawbacks of online learning?

Answered: 1 week ago