Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Please answer the following finance questions. PLEASE SHOW AND EXPLAIN ALL WORK! 1. Templeton Corp. plans to buy a piece of construction equipment for $200,000

Please answer the following finance questions. PLEASE SHOW AND EXPLAIN ALL WORK!

1. Templeton Corp. plans to buy a piece of construction equipment for $200,000 and depreciate it fully over 5 years using a straight-line method. However, it plans to use it for 7 years and then sell it for an unknown amount. The equipment will save $45,000 annually, before taxes. The discount rate in this case is 12% and the income tax rate is 33%. Find the resale value of the equipment after 7 years in order for Templeton to break even.

2. S. Davis Hospital, a non-profit entity, wants to buy a machine for $135,000, which will run for 6 years. The savings from the machine are uncertain, with an expected value of $35,000 per year and a standard deviation of $10,000. The hospital uses 10% as the discount rate and it does not pay any income taxes. Find the probability that the machine will be profitable (that is its NPV > 0). Should the hospital buy the machine?

3. Taleb Corp. is planning to acquire a machine at a cost of $120,000. The following table shows the expected life of the machine :

Probability_________Expected Life

15%________________4 years

20%________________5 years

65%________________6 years

The company will depreciate the machine on a straight-line basis with a life of 4 years, with no residual value. While the machine is in operation, it will generate a pretax income of $32,000 annually. The tax rate of Taleb is 31% and it uses a discount rate of 10%. Should Taleb buy the new machine?

4. Damodaran Corp. is considering the purchase of a new machine that has an expected life of 5 years with a standard deviation of 2 years. The machine will cost $45,000 and will generate a pre-tax income of $14,000 annually. The tax rate of Damodaran is 32% and its cost of capital is 13%. Damodaran will depreciate the machine on a straight-line basis over 5 years with no residual value.

(a) Calculate the probability that the machine will have a life of between 4 and 7 years.

(b) Is the machine acceptable if it runs for 6 years?

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

Introduction To Estimating Economic Models

Authors: Atsushi Maki

1st Edition

0415589878, 978-0415589871

More Books

Students also viewed these Finance questions

Question

2. Define communication.

Answered: 1 week ago