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Question 6 ( 1 point ) Gavin Mills has an existing facility that it paid 2 6 , 0 0 0 , 0 0 0

Question 6(1 point)
Gavin Mills has an existing facility that it paid 26,000,000 for 10 years ago. It has 3
choices for this facility now: sell it outright for 9.5M today, lease it for the next 4
years to a supplier, then sell it at the end of the last year of the lease for 5M, or use it
to produce flax seed for 4 years, then sell it at the end of the last year of production
for 6M, but it will have to be upgraded (today) for use at a cost of 1.5M (not paid
under the lease option). If it is used by Gavin to produce flax seed it can be sold for
$42 a bushel with a contribution margin ratio (how much the firm keeps after
variable costs of production) of 25%. To operate the plant, Gavin will incur $200,000
per year of fixed costs, regardless of production levels (not applicable to the lease).
Gavin forecasts that it will sell the following bushels in each of the next 4 years:
200,000,300,000,400,000,100,000. The lease terms would be $2M per year plus a
$200,000 per year reduction in costs for the supplies Gavin buys from the leasee.
Please use a WACC of 12%.
How much would the salvage value (sale price at the end of the lease) have to be to
change the decision? Please consider changes in $100,000 increments (i.e.5.2M to
5.1M) and enter your response in millions with no units and ONE decimal place:
"$5,100,000" would be "5.1".
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