Question 1 (30 marks) Instruction: Answer ALL Questions. The management team at Carlisa Enterprise wants to decide on one of two equipment: Blue22 and Red55. Each equipment has an estimated useful life of four years and are to be depreciated using the straight-line basis. The cost, insurance and freight (CIF) of the Blue22 is J$15,000,000. The custom duty on the asset is J$3,750,000. The asset is to be depreciated to a residual value of $750,000. The CIF of the Red55 is J$18,000,000 and can be depreciated to a residual value of $1,500,000. The custom duty on the asset is J$4,500,000. Both equipment are mutually exclusive and it is expected that an investment in either one would increase efficiency by reducing annual operating costs. The annual savings from each equipment were analyzed by the production manager who provided a report to senior management/outlined below: Blue22 $ 7,500,000.00 Red55 $ 12,000,000.00 Year 1 2 $ 12,375,000.00 $ 12,000,000.00 3 $ 13,500,000.00 4 $ 12,750,000.00 4 $12,000,000.00 $ 9,000,000.00 The entity's projects are discounted using the weighted average cost of capital. The company's marginal tax rate is 40% and depreciation is an allowable deduction for income tax purposes. It is assumed that all cash inflows occur at the end of each year. Projects are to be financed with 50% debt. The cost of debt is 15%. On the other hand, the cost of equity is determined using the capital asset pricing model (CAPM). The risk-free rate is half the cost of debt and the average return on the market is 16%. The stock's beta is 1.50. Required: (a) Compute and explain briefly, the term cost of capital. (b) Compute the following for each of the equipment above: (1) Net present value. (2) Accounting rate of return using initial investment. (3) Internal rate of return. (c) Advise senior management as to which machine is more feasible. (4 marks) (18 marks) (2 marks) (4 marks) (2 marks)