Ask Question, Ask an Expert

+1-415-315-9853

info@mywordsolution.com

Ask Basic Finance Expert

Directions: Read the information about ATC Corporation and use it to answer each of the following problems. Be detailed and complete in your answers, referring to any appropriate numbers. Use Word to type your answers and use Excel to do any necessary calculations.

ATC Corporation is a manufacturer of new and replacement parts for the aircraft industry. The company's major customers are airlines, other aircraft operators (such as charter services), and contract maintenance service providers. Despite the economic slowdown, the company expects its sales to be strong for several years, since many aircraft operators will be more interested in maintaining and repairing existing planes rather than buying new ones.

At the present time, ATC is considering an upgrade to its manufacturing facility. This will involve replacing several older machines by the purchase and installation of a new, state of the art, computer-controlled metal cutting and shaping machine center made by a German supplier. Estimates of the machine center's costs and benefits are shown in the table below. Although the machinery should last for at least ten years, the company uses a five-year planning period for equipment of this type (based on depreciation rules and company policy). Since the machine will not be sold at the end of year 5, there is no salvage value to consider.

Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
Initial Costs:
Purchase -3,600,000
Shipping -150,000
Installation -250,000
Cash Inflows:
Sale of Old Machines 200,000
Investment Tax Credit 350,000
Cost Savings 400,000 420,000 440,000 460,000 480,000
New Sales 0 50,000 100,000 120,000 150,000
Depreciation Tax Savings 350,000 600,000 430,000 300,000 200,000
Increased Product Quality 10,000 20,000 25,000 30,000 35,000
Net Cash Flows: -3,450,000 760,000 1,090,000 995,000 910,000 865,000

Three important things to note are that the above cash flows have been adjusted to include an assumed inflation rate of 3% per year, the company's average tax rate is 30%, and that the investment project is considered to be 20% riskier than the company's average investment.

Examination of ATC's balance sheet reveals that the company uses the following types of financing (all percentages are based on market value).

Financing Type Percentage of Total Financing Market Rate of Return
Short-Term Debt 15% 3.5%
Long-Term Debt 30% 5.25%
Preferred Equity 10% 8%
Common Equity 45% 12%

If ATC does not make this equipment investment, it has no other real asset investment projects which it is considering. Therefore, an alternative use of the money in the capital budget would be a purely financial investment, such as stock, bonds, short-term CD's, and so forth.

1. Based on your knowledge of current and projected economic conditions, does the company's assumption about future sales sound reasonable to you? Why or why not?
2. What cost of capital should the company use to analyze this investment project?
3. Without considering any other alternatives, is the machine a good investment for the company? Why or why not?
4. Without doing any calculations, discuss some possible alternatives which the company might have in terms of financial investments. Give some specific exs and make sure that you include a consideration of risk as part of your discussion.
5. Which choice would you recommend for the company? Why do you consider this option the best choice?
6. Suppose you are convinced that inflation over the next several years will be higher than the 3% which is forecast in the numbers the company is using in their projections. Without doing any further calculations, describe how you could adjust your analysis to account for this.

 

Basic Finance, Finance

  • Category:- Basic Finance
  • Reference No.:- M926943

Have any Question? 


Related Questions in Basic Finance

Suppose the current exchange rate for the polish zloty is z

Suppose the current exchange rate for the Polish zloty is Z 2.36. The expected exchange rate in three years is Z 2.63. What is the difference in the annual inflation rates for the United States and Poland over this perio ...

You have been asked to evaluate the effects of a new

You have been asked to evaluate the effects of a new educational video that was developed to reduce racial prejudice among adolescents. You plan to administer a pretest measure of racial attitudes to 60 adolescent partic ...

1 when a doublet is added to a uniform stream so that the

1. When a doublet is added to a uniform stream so that the source part of the doublet faces the stream, a cylinder flow results. Plot the streamlines when the doublet is reversed so that the sink faces the stream. 2. A 2 ...

1 which type of error do researchers usually regard as more

1. Which type of error do researchers usually regard as more serious? Why? 2. Explain what it means if a researcher sets the alpha level for a statistical test at .05. 3. What does it mean if the difference between two m ...

Examine the following pairs of puts which differ only by

Examine the following pairs of puts, which differ only by exercise price. Determine if any violate the rules regarding relationships between American options that differ only by exercise price. a. August 155 and 160 b. O ...

1 what changes to disaster recovery programs were being

1. What changes to disaster recovery programs were being proposed in 2009? 2. Investigate how civil defense and emergency management evolved in your state or city. Look at such factors as when it was created, its origina ...

In november 2009 the government of north korea announced

In November 2009, the government of North Korea announced that it was replacing the existing currency with a new currency. The government would allow people to exchange only a limited amount of the old currency for the n ...

Make up an example of deduction or deductive reasoningin

Make up an example of deduction or deductive reasoning. In deductive reasoning, if the premises or initial observations are true, does this guarantee that the conclusion is true? Explain why or why not.

Assignment lasa- capital budgeting techniquesas a financial

Assignment: LASA- Capital Budgeting Techniques As a financial consultant, you have contracted with Wheel Industries to evaluate their procedures involving the evaluation of long term investment opportunities. You have ag ...

Explain why interest rate swaps are more widely used than

Explain why interest rate swaps are more widely used than currency and equity swaps? Explain how swaps are similar to but different from forward contracts? Suppose that a party engages in a swap, but before the expiratio ...

  • 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

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

Describe what you learned about the impact of economic

Describe what you learned about the impact of economic, social, and demographic trends affecting the US labor environmen