Ask Question, Ask an Expert

+1-415-315-9853

info@mywordsolution.com

Ask Basic Finance Expert

Part 1: 

Sovereign Mines is a large mining firm considering purchase of a latest drilling machine. The machine will be employed to drill for iron ore at an existing mine site in Australia. Sovereign Mines is one of the leading manufacturers of iron ore in Australia. In order to narrow their drill machine search Sovereign Mines commissioned a market analysis at a cost of $5000 (yet to be paid). The study identified two candidate machines.

Machine A costs $100,000 and will necessitate installation costs of $5,000. Machine A can run for six years at which time it will have the salvage value of $5,000. The machine will necessitate initial working capital of $80,000 and will produce annual revenues of $150,000 and cash operating expenditures of $102,000. The salesman for Machine A is offering a loan at 10% per annum compounded monthly for the 6 year life of the machine.

Machine B can be purchased for $150,000 and necessitates installation costs of $4,000. The machine will necessitate initial working capital of $70,000 and will create annual revenues of $155,000 and cash expenses of $95,000. Its anticipated salvage value at end of its ten-year life is $2,000.

The tax rate for the corporation is 30% and the company policy is to depreciate assets (including installation costs) to zero using straight line method. Sovereign Mines estimates the covariance between the ASX200 and Sovereign Mines to be .06. The standard deviation of ASX200 returns is 25% and the standard deviation of Sovereign Mines is 35%. The anticipated return on the ASX 200 is 12% and the risk free rate is 7%. The firm is 100% equity financed.

Which Machine should Sovereign Mines select and why (show all working). You need to report to the Board of Directors on viability of this investment, including a clear explanation of cash flows under analysis. The Board includes a cross section of smart people but some have little or no finance training so your report requires completely describe and justify the evaluation techniques and your final verdict.

Part 2: 

Discussion around government funded maternity leave programs has led you to think that taxes will increase before the project can be implemented. How does your analysis in part 1 change if tax rate is increased to 40%?

Part 3: 

As the Chief Investment Officer you are concerned that the values applied to estimate the discount rate have not been updated for several years. As Sovereign Mines is not a publicly listed company you require find a proxy company which reflects the profile of your firm. You need to find out a suitable proxy and collect the needed data to empirically estimate a proxy beta which can be applied to Sovereign Mines taking care to adjust for changes in leverage. You then use the beta to estimate an appropriate discount rate for Sovereign Mines. You will also need to collect data to estimate the risk free rate and the anticipated equity risk premium.

You prepare a report to board outlining your analysis of the choice of Machine using proxy discount rate. In your report you should completely discuss and justify the data you incurred, the time period and data interval used and the estimation procedure you applied.

Part 4: 

You are having second thoughts about your choice of Proxy Company and are concerned that a wrong choice might impact on the investment decision. To alleviate your fears (and those of the board) you run a sensitivity analysis to see how changes in beta estimate affect your investment choice. You include this analysis in your report to the board and discuss the insinuations of you analysis.

Basic Finance, Finance

  • Category:- Basic Finance
  • Reference No.:- M91684

Have any Question? 


Related Questions in Basic Finance

Consider a period in which the us dollar weakens against

Consider a period in which the US dollar weakens against most foreign currencies. How does this affect the reported earnings of a US-based MNC with subsidiaries all over the world? Consider a period in which the US dolla ...

1 according to readygov what are the three basic steps

1. According to Ready.Gov, what are the three basic steps people can take to prepare for any type of disaster? 2. What are the seven key elements that can be used to measure the comprehensive nature of an evacuation plan ...

1 in addition to the key words you should also be able to

1. In addition to the key words, you should also be able to define the following terms: third-variable problem directionality problem confounding variable random process placebo mundane realism experimental realism 2. De ...

Check and revise sentences for parallel structuredetermine

Check and revise sentences for parallel structure Determine whether the following sentences use parallel structure. Revise sentences as needed to make the structure parallel. a. The executive at Ernst & Young writes repo ...

Two astronauts with masses m1 and m2 say goodbye and push

Two astronauts with masses m1 and m2 say goodbye and push each other off in the space. The initial velocity of both v0 and after the push off the astronaut with the mass m1 moves with the velocity v1 in the same directio ...

1 labor budget calculating the fixed labor budget instead

1. Labor budget: calculating the fixed labor budget. Instead of the benefits stated in Exhibit l.4e, assume that all benefits are 210/6 and all raises are 3.5% and calculate the fixed labor budget for January, February, ...

Show how a combination of interest rate caps and floors can

Show how a combination of interest rate caps and floors can be equivalent to an interest rate swap ? What are the advantages and disadvantages of an interest rate collar over an interest rate cap? Explain how the Black m ...

Rewrite a networking emailimagine that your friend ron asks

Rewrite a networking email. Imagine that your friend, Ron, asks you to review a draft networking email before he sends it. His goal is to get a summer internship in the marketing department of the company. What advice wo ...

Please in your own words what are dividends what are some

Please, in your own words. What are dividends? What are some different types of dividends?

1 what are the four basic goals of behavioral research2

1. What are the four basic goals of behavioral research? 2. Distinguish between basic and applied research. In what ways are basic and applied research interdependent?

  • 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