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

The suboptimal glass company uses a process of capital

The Suboptimal Glass Company uses a process of capital rationing in its decision making. The firm's cost of capital is 10 percent. It will only invest $77,000 this year. It has determined the internal rate of return for ...

1 what is a standby commitment when and why is it used2

1. What is a standby commitment? When and why is it used? 2. What is a mini-perm or bullet loan? When and why is this type of loan used? 3. Third-party lenders sometimes provide gap financing for project developments. Wh ...

The stock of bruin inc has an expected return of 22 percent

The stock of Bruin, Inc., has an expected return of 22 percent and a standard deviation of 35 percent. The stock of Wildcat Co. has an expected return of 14 percent and a standard deviation of 40 percent. The correlation ...

Wilmas vegetable market had the following transactions

Wilma's Vegetable Market had the following transactions during 2012: 1. Issued $25,000 of par value common stock for cash. 2. Recorded and paid wages expense of $10,000. 3. Acquired land by issuing common stock of par va ...

In the presence process arsine and trimethylgallium vapors

In the presence process, arsine and trimethylgallium vapors are diluted in hydrogen gas and fed to the horizontal CVD reactor shown in Figure 30.2. The composition of arsine and trimethylgallium in the feed gas are both ...

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 ...

A random sample of the birth weights of 186 babies has a

A random sample of the birth weights of 186 babies has a mean of 3103 g and a standard deviation of 691 g. Construct a 98% confidence interval estimate of the mean birth weight for all such babies. What is the confidence ...

1 show that when you apply node splitting to a nonreducible

1. Show that when you apply node splitting to a nonreducible ow graph, and then perform T1-T2 reduction on the resulting split graph, you wind up with strictly fewer nodes than you started with. 2. What happens if you ap ...

Question1which of the following is considered a major

Question 1.Which of the following is considered a major process flow structure? Lead Time Fabrication Lean Manufacturing Project 2. ISO audits result in certifications that are done by first, second, or third parties. Wh ...

Mirr rak corp is evaluating a project with the following

MIRR RAK Corp. is evaluating a project with the following cash flows: Year 0: -41,000, Year 1: 15,700, Year 2: 19,400, Year 3: 24,300, Year 4: 18,100 and Year 5: -9,400. The company uses an interest rate of 10 percent on ...

  • 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