1) Zoltec Corp is considering purchase of new manufacturing equipment for the existent line of products. Cost of new equipment is= $85,000. Use of this equipment is expected to decrease manufacturing costs by= $8,000 annually. Machine belongs to asset class 43 with the CCA rate of 30%, and Zoltec expects to sell machine at the ending of its 5-year operating life for= $15,000. The firm expects that new machine will need a $12,000 investment in net working capital. Afterwards, starting with year one, NWC related to project will increase by 5% every year. Required working capital will be recaptured when machine is sold after five years. Zoltec’s marginal tax rate is= 34%, and it uses a 10% cost of capital to estimate projects of this nature.

i) What is ment the PVCCATS?

ii) Compute the NPV of project? Must Zoltec buy machine? (Yes/No)

2) The business risk and optimal capital structure of the firm, tutor made given statement: The major factors which affect business risk are ability to adjust output prices and operating leverage and business risk is uncertainty regarding net income of the firm. For the levered firm 40/60 debt to equity ratio is optimal capital structure that always maximizes value of a firm. Do you agree or disagree with tutor’s statement? Briefly describe.