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Oshawa Motors Limited is considering purchasing a paint machine. The machine will result in before tax cost savings of $30,000 per year for 10 years. Assume CCA rate of 30%, salvage value of zero, and asset pool will remain open. The paint machine will not add/reduce the risk of the firm. Cost of unlevered equity is 12%, corporate tax rate is 40%, and risk free rate of return is 4%. Hint: Use risk free rate to discount CCATS.

a. What is the maximum price Oshawa should pay for the machine?

b. Suppose due to economic conditions provincial government is willing to lend Oshawa $100,000 at 3% for 5 years. Interest will be paid each year on the outstanding balance at the beginning of each year. Principal will be paid back in 5 installments of $20,000 each at the end of each year of the loan. Using APV approach, what is the maximum price Oshawa would be willing to pay for the machine if Oshawa's cost of debt is 6%

Basic Finance, Finance

  • Category:- Basic Finance
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