Question
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?
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