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

Compare and contrast the physical and risk characteristics

Compare and contrast the physical and risk characteristics of Treasury debt securities with municipal securities. What are the advantages and disadvantages of each for the borrower? What are the advantages and disadvanta ...

1 what is the traditional cash equivalency approach used to

1. What is the traditional cash equivalency approach used to determine how below-market-rate loans affect value? 2. How can the effect of below-market-rate loans on value be determined using investor criteria? 3. ARGUS. ...

A company tests all new brands of golf balls to ensure that

A company tests all new brands of golf balls to ensure that they meet certain specifications. One test conducted is intended to measure the average distance traveled when the ball is hit by a machine. Suppose the company ...

Crypton electronics has a capital structure consisting of

Crypton Electronics has a capital structure consisting of 41% common stock and 59% debt. A debt issue of $100 0par value, 5.8% bonds that mature in 15years and pay annual interest will sell for $975. Common stock of the ...

1 describe the actions you will take ie increasing

1. Describe the actions you will take (i.e., increasing deductions or reducing gross income) to achieve tax savings in the present year. 2. Detail the means by which you will reduce your tax liability in the future (i.e. ...

Why should capital budgeting for projects in an overseas

Why should capital budgeting for projects in an overseas subsidiary be assessed from the parent's perspective rather than just the subsidiary's cash flow perspective? What additional factors deserve consideration in mult ...

1 distinguish between a quota sample and a purposive

1. Distinguish between a quota sample and a purposive sample. 2. What three criteria characterize good descriptions of data?

How would you identify the best nut factor for your

How would you identify the best nut factor for your application? How much torque would be required to tighten an ASTM A193 Gr. B16 bolt with a 31/4-8 thread to 60% of yield? Why does a wrench create a side load on the bo ...

If a hospital were to receive 4000 per year in payments at

If a hospital were to receive $4,000 per year in payments at the end of each year for the next 12 years from an uninsured patient who underwent an expensive operation. What would be the current value of these collection ...

A firm has a capital structure that uses 45 percent equity

A firm has a capital structure that uses 45 percent equity, 20 percent preferred shares, and 35 percent debt. The preferred shares have a current yield of 5.5 percent. The debt has a coupon rate of 10 percent and a curre ...

  • 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