Purchase Solution

Cash flows and bond decision making for Milken Toupee and Lawn Service

Not what you're looking for?

Ask Custom Question

Background: The M. Milken Toupee and Lawn Service (MMTLS) is considering purchasing a new paving machine, the Beta. This new machine will replace the current paving machine, the Alpha. The Alpha was purchased two years ago for $2 million and is being depreciated on a straight-line basis, over its original economic life of 5 years, to a book value of $0. It is anticipated that the Alpha can be sold at the end of its economic life, in 3 years, for $50,000. The Alpha could be sold today for $1 million.

The Beta will cost $3 million and will be depreciated over its economic life of 3 years to a book value of $0. MTPS expects to sell the Beta in three years for $200,000. If the Beta is purchased and installed, operating costs will fall by $1 million each year for the next three years. As a result of the purchase of the Beta, accounts receivable and inventories will increase by a total of $200,000 each and accounts payable will increase by a total of $400,000. In order to properly operate the Beta, three employee need to be specially trained. When the Alpha was purchased MTPS paid $80,000 to train 3 employees and this training will also allow them to operate the Beta.

Assume that MTPS has an ordinary tax rate of 40%, a capital gain rate of 20%, and a WACC 15%. Due to current market conditions, MTPS intends to finance the Beta with 9% coupon, 3-year bonds that will be issued at par.

A) Should MTPS acquire the Beta?

To address this, calculate:

? The cash flows in year 0, the net initial investment (NINV).
? The operating cash flows (OCF) in years 1 - 3.
? The terminal-year cash flows, i.e., the non-OCF in year 3.

B) Identify which cash flows would be affected if MTPS employed an accelerated depreciated method instead of straight-line depreciation and provide the direction of the affect, i.e., positive or negative...

Purchase this Solution

Solution Summary

The solution presents a comprehensive schedule to analyze the options for purchase of the Beta machine. There are extensive notes to explain the calculations also.

Solution provided by:
Education
  • BE, Bangalore University, India
  • MS, University of Wisconsin-Madison
Recent Feedback
  • "Your explanation to the answers were very helpful."
  • "What does 1 and 0 means in the repair column?"
  • "Went through all of the formulas, excellent work! This really helped me!"
  • "try others as well please"
  • "Thank you, this helped a lot. I was not sure how to plug in those numbers to a formula. This was a great help. Now I have to figure out how to explain cost of capital is used in net present value analysis, and how cost of capital is used in net present value analysis. This stuff gets confusing."
Purchase this Solution


Free BrainMass Quizzes
Motivation

This tests some key elements of major motivation theories.

Paradigms and Frameworks of Management Research

This quiz evaluates your understanding of the paradigm-based and epistimological frameworks of research. It is intended for advanced students.

Writing Business Plans

This quiz will test your understanding of how to write good business plans, the usual components of a good plan, purposes, terms, and writing style tips.

Learning Lean

This quiz will help you understand the basic concepts of Lean.

Business Processes

This quiz is intended to help business students better understand business processes, including those related to manufacturing and marketing. The questions focus on terms used to describe business processes and marketing activities.