Ask Question, Ask an Expert

+1-415-315-9853

info@mywordsolution.com

Ask Basic Finance Expert

Bobs Bikes Ltd has recently (late 2003) completed a $100,000, two-year marketing study on introducing a new tricycle model. Based on the results of the study, Bobs Bikes expects to sell 1,000 of the new tricycles in 2004 at a price of $300 each. Sales volume will grow at 10% p.a. for the four years through to 2007 in real terms and Bobs expects that the price for each tricycle will increase along with the expected inflation rate of 5% p.a.

Bobs will need to buy a tricycle welding machine for $500,000. The machine will be depreciated for tax purposes over five years using straight line depreciation. The incremental labour expenses to produce the tricycles will be $100,000 p.a. without allowing for inflation. Materials are expected to cost $100 per tricycle in 2004 dollars Labour and materials prices will grow with inflation. Bobs Bikes also expects that the company will need $100,000 in working capital to run the business; this amount is not expected to grow.

Bobs Bikes is an ongoing, profitable business and pays taxes at a 30% rate on all income. Bobs Bikes has a 50% target debt/equity ratio, a nominal cost of equity of 14% p.a. and a nominal cost of debt of 8% p.a.

At the end of 2007 Bobs Bikes plans to consider the following alternatives:

a) Sell the welding machine for $200,000 and close the tricycle business; or

b) Sell the tricycle business for an after-tax price of five times the 2007 after-tax profit

Basic Finance, Finance

  • Category:- Basic Finance
  • Reference No.:- M938102

Have any Question? 


Related Questions in Basic Finance

1 the interested student should rewrite the equations for

1. The interested student should rewrite the equations for the vertically integrated utility to show that the total revenue received from all activities is equal to the sum of all input costs, plus the sum of all capacit ...

Consider a world of perfect capital marketsnbsp this world

Consider a world of perfect capital markets.  This world has no corporate or personal taxes, all investors have homogeneous expectations, no bankruptcy costs, and M&M's no-tax theory of capital structure is true. Company ...

1 comment on the following statement a key benefit of

1. Comment on the following statement: A key benefit of leasing is that it allows for the effective depreciation of land. 2. How would the availability of floating-rate debt rather than fixed-rate debt affect the lease-v ...

Define a currency option related terms and pricing

Define a currency option, related terms, and pricing factors.

If a firm were contemplating increasing the cash discount

If a firm were contemplating increasing the cash discount it offers its credit customers for early payment, what key variables would need to be considered when quantitatively analyzing this decision? How do the variables ...

Craigs manufacturing company is considering the purchase of

Craig's Manufacturing Company is considering the purchase of a new machine for a cost of$250,000. The new machine will have a 5-year useful life and will be depreciated to anexpected salvage value of zero using the strai ...

How many variance and covariance terms does the expression

How many variance and covariance terms does the expression of variance on a 5 asset portfolio have?

1 before 1933 there was no federal deposit insurance was

1. Before 1933, there was no federal deposit insurance. Was the liquidity risk faced by banks during those years likely to have been larger or smaller than it is today? Briefly explain. 2. Does the existence of reserve r ...

Explain the following paradox a put option is a highly

Explain the following paradox. A put option is a highly volatile security. If the underlying stock has a positive beta, then a put option on that stock will have a negative beta (because the put and the stock move in opp ...

M cdonalds sells hamburgers in indiain 1954 a

M cDONALD'S SELLS HAMBURGERS IN INDIA In 1954, a milkshake-mixer salesman named Ray Kroc traveled to San Bernardino, California, to see why one restaurant had ordered so many of his Multimixers. The McDonald brothers had ...

  • 4,153,160 Questions Asked
  • 13,132 Experts
  • 2,558,936 Questions Answered

Ask Experts for help!!

Looking for Assignment Help?

Start excelling in your Courses, Get help with Assignment

Write us your full requirement for evaluation and you will receive response within 20 minutes turnaround time.

Ask Now Help with Problems, Get a Best Answer

WalMart Identification of theory and critical discussion

Drawing on the prescribed text and/or relevant academic literature, produce a paper which discusses the nature of group

Section onea in an atwood machine suppose two objects of

SECTION ONE (a) In an Atwood Machine, suppose two objects of unequal mass are hung vertically over a frictionless

Part 1you work in hr for a company that operates a factory

Part 1: You work in HR for a company that operates a factory manufacturing fiberglass. There are several hundred empl

Details on advanced accounting paperthis paper is intended

DETAILS ON ADVANCED ACCOUNTING PAPER This paper is intended for students to apply the theoretical knowledge around ac

Create a provider database and related reports and queries

Create a provider database and related reports and queries to capture contact information for potential PC component pro