Question 14 Mick Ronalds is a fast-food establishment that is considering replacing its fryolator. The cost of the new fryolator is $200,000. For tax purposes, depreciation is allowed at 20% on prime cost (this means, straight line over the next five years). The fryolator would be sold for $40,000 at the end of its ten-year life. Operating expenses will be $90,000 per annum, compared with $120,000 a year for the existing fryolator. However, if the existing fryolator were kept, $70,000 would need to be spent in four years time on maintenance, which would be immediately expensed for tax purposes. The existing fryolator is being depreciated at $6,000 a year. It now has a book value of $60,000. This fryolator could be sold today for $50,000. Alternatively, it could be used for the next ten years and then scrapped for nil value. The tax rate is 30%. Mick Ronalds equity beta is 1.00, the pre-tax cost of debt is 20% and the risk free rate and market return are 6% and 14%, respectively. Mick Ronalds debt to equity ratio is 1. a. What is the firms overall cost of capital? b. What is the firms initial investment (CF0)? c. What is the firms operating cash flow in year 1(CF1)? (Note that CF2, CF3 and CF5 will be the same as CF1)? d. What is the firms operating cash flow in year 4 (CF4)? e. What is the firms operating cash flow in year 6 to 10? f. What is the firms terminal cash flow(CF10)-excluding the last operating cash flow at year 10? g. Should Mick Ronald replace the existing fryolator with a new one? Why? Explain