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

1 advise the sampsons on the maturity to select when

1. Advise the Sampsons on the maturity to select when investing their savings for their children's education. Describe any advantages or disadvantages of the relatively short-term maturities versus the longer-term maturi ...

Use footnotes to document sources assume you are writing a

Use footnotes to document sources. Assume you are writing a report and have used the following secondary sources. • An article written by Mary Morgan on pages 45-48 of the April 2, 2013, edition of Business Week entitled ...

1 banking services list and describe some of the banking

1. Banking Services. List and describe some of the banking services offered by financial institutions. 2. Debit Versus Credit Card. What is the difference between a debit card and a credit card? 3. Special Services. Name ...

Given the following information on big brothers inc

Given the following information on Big Brothers, Inc. capital structure, compute the company's weighted average cost of capital (WACC). The company's marginal tax rate is 40%. Round the answer to two decimal places in pe ...

The performance of a journal bearing around a rotating

The performance of a journal bearing around a rotating shaft is a function of the following variables: Q, the rate of flow lubricating oil to the bearing in volume per unit time; D, the bearing diameter; N, the shaft spe ...

1 compare and contrast economic market and relevancy value2

1. Compare and contrast economic, market, and relevancy value. 2. Illustrate the differences in product/service creation, presentation, and positioning. 3. Explain the folIowing statement: "The methodology is systems ana ...

Assignmentbackgroundfinancial literacy helps you to become

Assignment Background: Financial literacy helps you to become a better manager. Understanding the financial side of the business will make you more effective on the job and will make your work life more meaningful. The t ...

1 where is lead most likely to be found in a household2

1. Where is lead most likely to be found in a household? 2. Identify the criteria for determining existence of wetlands. 3. What happens to land containing an endangered species habitat? 4. Discuss a landowner's rights i ...

1 based on the cash flow statement and personal balance

1. Based on the cash flow statement and personal balance sheet, do the Sampsons have adequate liquidity to cover their recurring cash flows and planned monthly savings in the long-run? If not, what level of savings shoul ...

Assume the followingerm 7rf 2expected risk premium on

Assume the following: E(rM) = 7% rF = 2% Expected risk premium on Boeing stock = 7% What is the expected return on Boeing stock? Show your work

  • 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