Q. Alden Ltd. is evaluating the purchase of a new machine that will cost $422,000.  The existing machine is worth $110,000.  The total number of units the firm can produce with the old machine is 200,000. The new machine will result in production increasing by 75,000 units.  All production is sold at a price of $6.00 per unit. The total costs of production with the old machine are $3.50 per unit. With the new machine costs will decline by $0.40 per unit.  Using marginal analysis, should Alden replace the current machine? 

Q. Laidlaw Inc. is evaluating the purchase of a new piece of equipment costing $250,000.  The equipment is expected to have a life of 15 years.  The firms after-tax cost of financing is 15.3%.  The additional before-tax operating cash flows associated with the acquisition of the equipment are expected to average $60,625 per year. The firm’s tax rate is 20%.  Using an EVA analysis, should Laidlaw acquire the new piece of equipment? 

Q. Bond A is a premium bond with a 10 percent coupon. Bond B is a 6 percent coupon bond currently trading at a discount. Both bonds make annual coupon payments, have a YTM of 8 percent, and have eight years to maturity.

a. What is the current yield for Bond A? For Bond B?

[Note: Current yield = annual coupon payment / current price of the bond.]

b. If interest rates remain unchanged, what is the expected capital gains yield, stated as a percentage, over the next year for Bond A? For Bond B?

c. Briefly explain the interrelationship among your answers.