Please write the equations on how you calculate. Thanks. The question is revised.

Should Cherry acquire the use of the zippy ( investment decision)?

You are considering the purchase of a new zippy fabricating machine for your firm, Cherry Enterprises, Inc. CEI makes novelty items for wholesale to retail outlets located in tourist traps. The purchase of the zippy will allow CEI to market a new product, a walking stick with built-in bear repellant. In order to analyze the decisions to manufacture and sell the walking sticks and to lease the zippy, you have collected the following data, some of which may be relevant (all dollars in 2020 prices):

Cost of zippy = $8,500,000

Useful life of zippy = 10 years

Salvage value of zippy = $0

Expected walking stick sales volume (in lots of 1000) = 2500/year

Wholesale price per 1000 lot of walking sticks = $999

Annual zippy maintenance contract costs (no inflation) = $100,000 (only cash fixed cost)

Average variable cost per lot of walking sticks = $500

Additional working capital (supplies inventory) required at beginning of year 1 = $150,000

Current equity = $50,000,000

Current debt = $58,000,000

Tax rate for CEI = 35%

Inflation rate = .03

Inflation starts in year 2.

Here are some notes may help for the calculation.

1. All cash costs and revenues increase at 3% per year, beginning in year 2. Stating inflation in year 2, inflating the variable costs and keeping the fixed costs fixed with no inflation

2.Assume that the change in the tax code in 2017 has expired (as it is claimed to do). Therefore, spread depreciation expense out over the life of the assessed on a straight-line basis.The new tax code states to put all your depreciation in year 1.

3.Working capital is -150,000in year 0and+150,000 in year 10. Zero can be placed for change in working capital in years 1-9.

4.The WACC is the right discount rate for the investment decision(debt financing) analysis. the calculated after tax WACC is what is used in calculating the NPV for the free cash flows that are generated from the investment part only. use nomilar cash flows (inflated) and nominal discount rate.The debt rate is already nominal.You will need to convert the real equity rate to nominal.

5.The bank loan 8.5% is only cited so that it is used to calculate the WACCand the net interest rate used for the lease.

6.Annual sales volume is 2500 lots.Year 1 revenue is 2500*$999