Part B (15 points) Maple Leafs Sports & Entertainment is considering purchasing

Question

Part B (15 points) Maple Leafs Sports & Entertainment is considering purchasing one of the following two pieces of lighting equipment Equipment A has a purchase price of $10 million and will cost, $240,000 pre-tax, to operate on an annual basis. This equipment will have to be replaced every 5 years and has a salvage value of $1 million. Equipment B on the other hand, has an initial cost of $14 million and costs $210,000 pre-tax, annually to operate. This equipment has a useful life of 7 years with a salvage value of $1.2 million. Both equipment sets are in an asset class with a CCA Rate of 30% and are otherwise identical. The income tax rate is 40 percent and the appropriate discount rate is 10%. Which equipment should the company purchase and why?

Explanation / Answer

Here it is better to invest in equipment A as it has low cost as compared to the equipment B so company has to purchase Equipment A

Cash outflow Year Amount P V Factor@ 10% Present Value Cash outflow 0 100 1 100.000 Cash outflow 1 2.4 0.909 2.182 Cash outflow 2 2.4 0.826 1.983 Cash outflow 3 2.4 0.751 1.803 Cash outflow 4 2.4 0.683 1.639 Cash outflow 5 2.4 0.621 1.490 Less:- Cash inflow (salvage) 5 10 0.621 6.210 102.888 useful life of this machine is 5 years so per year cost 20.57758 Equipment B Year Amount P V Factor@ 10% Present Value Cash outflow 0 140 1 140.000 Cash outflow 1 2.1 0.909 1.909 Cash outflow 2 2.1 0.826 1.736 Cash outflow 3 2.1 0.751 1.578 Cash outflow 4 2.1 0.683 1.434 Cash outflow 5 2.1 0.621 1.304 Cash outflow 6 2.1 0.564 1.185 Cash outflow 7 2.1 0.513 1.078 Less:- Cash inflow (salvage) 7 12 0.513 6.156 144.068 useful life of this machine is 7 years so per year cost 20.5811

Related Questions

Navigate

• Browse (All)
• Browse P
• Subjects

---