The variance of the return on Jumo Manufacturing equity is 0.905, the variance of return on the fully diversified market portfolio is 0.1448, and the correlation between the return on Jump equity and the return on the fully diversified market portfolio is 0.8.

a) Calculate the CAPM beta for Bruno equity. What is the expected return on Bruno equity if the current risk free rate is 3% and expected excess return on the fully- diversified market portfolio is 5%?

Juno is analyzing two machines to determine which one it should purchase. Machine A has a cost of $283,500, annual maintenance costs of $7,500, and a 7-year life, at which time its parts have scrap value of $15,000. Machine B costs $185,000, has annual maintenance costs of $12,500, and has a 5-year life, at which time its parts have scrap value of just $5,000. Whichever machine is purchased will be replaced at the end of its useful life for the foreseen future. The machine that is chosen does not affect Brunos revenue or other production costs (such as labor, energy, or raw materials).

Assume that Jumo faces a corporate tax rate of 34% and has profitable ongoing operations so it can take full advantage of depreciation. Machine A can be depreciated on a straight-line basis over 7 years, and Machine B over 5 years.

Jumo discounts all its expenses (including the depreciation tax shield) at the CAPM required equity rate of return.

b) What are the after-tax cash flow net costs associated with one cycle of ownership and operation of either type of machine? [Give these by year.]

c) Which machine should Bruno purchase and why? [Hint: It is probably easiest to calculate the annuity factors first.]