Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Holliday Manufacturing is considering the replacement of an existing machine. The new machine costs $1.2 million and requires installation costs of $150,000. The existing machine

Holliday Manufacturing is considering the replacement of an existing machine. The new machine costs $1.2 million and requires installation costs of $150,000. The existing machine can be sold currently for $185,000 before taxes. It is two years old, cost $800,000 new, and has a $384,000 book value and a remaining useful life of five years. It was being depreciated under MACRS, using a five year recovery period, and therefore has the final four years of depreciation remaining. If it is held for five more years, the machines market value at the end of year 5 will be $0. Over its five year life, the new machine should reduce operating costs by $350,000 per year. The new machine will be depreciated under MACRS, using a five year recovery period. The new machine can be sold for $200,000 net of removal and cleanup costs at the end of five years. An increased investment in net working capital of $25,000 will be needed to support operations if the new machine is acquired. Assume the that the firm has adequate operating income against which to deduct any loss experienced on the sale of the existing machine. Hollidays total capital has a market value of $10 million, with $3 million in debt and $5 million in common equity. Hollidays has an equity beta of 1.2, a cost of debt of 8%, and a cost of preferred stock of 12.8%. The annual market risk premium is 5% and the 5-year Treasury note has a yield of 4%

I've calculated the WACC to be 9% but I have no idea what to do for the following question

2. Develop the net cash flows needed to analyze the proposed replacement project.

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_2

Step: 3

blur-text-image_3

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

Applied International Finance

Authors: Thomas J O'Brien

1st Edition

1606497340, 9781606497340

More Books

Students also viewed these Finance questions

Question

specify some main features of the worlds labour force;

Answered: 1 week ago