Purchase Solution

A fishing company is considering the purchase of a new boat. The company is presently financed by a mix of 70% owners equity ad 30% debt, the after tax cost of capital is 12%. Should they buy it?

Not what you're looking for?

Ask Custom Question

A fishing company is considering the purchase of a new boat. The company is presently financed by a mix of 70% owners equity ad 30% debt, the after tax cost of capital is 12%. The details are as follows:

(see chart in attached file)

Cost of boat $20000
Useful life 4 years
Salvage value 4000
Depreciation method, down to zero book value Straight line
Annual cash savings from boat, before tax and depreciation $10000
Rate of interest on a 4 year term loan 10% per annum
Marginal tax rate 47%
Annual lease rentals (4 years) payable at the beginning of each year $6000
Residual lease value $7000
Annual operating expenses paid by lessor $1000

(i) evaluate whether or not the truck acquisition is justified as an investment project.
(ii) Should the company lease the boat

Attachments
Purchase this Solution
Solution Summary

In this detailed solution the computation and rationale explained for the given finance problem.

Solution Preview

** Please see the attached file for the complete solution response **

A fishing company are considering the purchase of a new boat. The company is presently financed by a mix of 70% owners equity ad 30% debt, the after tax cost of capital is 12%. The details are as follows:
Cost of boat $20000
Useful life 4 years
Salvage value 4000
Depreciation method, down to zero book value Straight line
Annual cash savings from boat, before tax and depreciation $10000
Rate of interest on a 4 year term loan 10% per ...

Purchase this Solution
Free BrainMass Quizzes
Social Media: Pinterest

This quiz introduces basic concepts of Pinterest social media

Business Ethics Awareness Strategy

This quiz is designed to assess your current ability for determining the characteristics of ethical behavior. It is essential that leaders, managers, and employees are able to distinguish between positive and negative ethical behavior. The quicker you assess a person's ethical tendency, the awareness empowers you to develop a strategy on how to interact with them.

IPOs

This Quiz is compiled of questions that pertain to IPOs (Initial Public Offerings)

Transformational Leadership

This quiz covers the topic of transformational leadership. Specifically, this quiz covers the theories proposed by James MacGregor Burns and Bernard Bass. Students familiar with transformational leadership should easily be able to answer the questions detailed below.

Team Development Strategies

This quiz will assess your knowledge of team-building processes, learning styles, and leadership methods. Team development is essential to creating and maintaining high performing teams.

View More Free Quizzes
Related BrainMass Solutions

  • Hard Removals: Analysis of Lease or Buy option for a new truck

    The firm is presently financed by a mix of 70% owner's equity and 30% debt, the after tax cost of capital being 12%.

  • Finance Questions: Capital Budgeting

    The company's equity can be purchased for $1.2 million in cash and is expected to generate after tax cash flows of $250,000 a year for 10 years, with no terminal value. The acquisition candidate is financed with 60% debt and 40% equity.

  • Earnings and Leverage, Investment Opportunity, Tax Shield, WACC, Market value

    Reliable Gearing currently is a all-equity-financed. It has 10,000 shares of equity outstanding. Selling at $100 a share. The firm is considering a capital restructuring.

  • Finding WACC of Company ABC

    What is the weighted average cost of capital? Company ABC has a before tax cost of debt of 12% and a before tax cost of equity of 20%. 30% of the company is finances with debt and 70 % is financed with equity. Tax rate is 35%.

  • WACC

    348496 Estimating a firm's cost of capital The Super Muench Cookie Company has a capital structure consisting of 30% debt and 70% equity based on market values.

  • Control premium percentage, total transaction value

    The risk-free rate, Rf, is 7 percent, and the expected market rate of return, Rm, is 15 percent. Firm A is financed by 80 percent equity and 20 percent debt, and this leverage will also remain unchanged after the acquisition.

  • Lease and Bond valuation questions

    A lease versus purchase analysis should compare the cost of leasing to the cost of ownin, assuming that the asset purchased A. is financed with short-term debt B. is financed with long-term debt.

  • Capital Budgeting: Wyoming Processing, Klemkosky, Michigan Corp, Athens Development

    The company's equity can be purchased for $1.2 million in cash and is expected to generate after tax cash flows of $250,000 a year for 10 years, with no terminal value. The acquisition candidate is financed with 60% debt and 40% equity.

  • Tyseeland Company- Financing of New Projects

    Proportion of debt= 30/60= 0.5 Proportion of equity= 30/60= 0.5 After tax cost of debt=rd (1-Tax rate)= 8% (1-40%)= 4.80% Cost of equity= 12% WACC=proportion of debt x After tax cost of debt + Proportion of equity x Cost

View More Related Solutions