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Use the following information to answer the questions below; Sanad Inc. is considering replacing an existing piece of equipment with a more...
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Use the following information to answer the questions below;

Sanad Inc. is considering replacing an existing piece of equipment with a more sophisticated machine. The following information is given.






The firm has determined its optimal capital structure, which is composed of the following sources and target market value proportions:



Debt: The firm can sell a 20-year, $1,000 par value, 9 percent bond for $980. A flotation cost of 2 percent of the face value would be required in addition to the discount of $20.

Preferred Stock: The firm has determined it can issue preferred stock at $65 per share par value. The stock will pay an $8.00 annual dividend. The flotation cost stock is $3 per share.

Common Stock: The firm's common stock is currently selling for $50 per share. The dividend expected to be paid at the end of the coming year is $5.07. Its dividend payments have been growing at a constant rate for the last five years. Five years ago, the dividend was $3.45. It is expected that to sell, a new common stock issue must be underpriced at $1 per share and the firm must pay $3 per share in flotation costs. 


The firm pays 40 percent taxes on ordinary income and capital gains. Sanad invests $5,000 in NWC that will be recovered at the final year of the project.


  

Year1= 12,400 , Year2=28,960 , Year3= 36,120 , Year4= 24,960 , Year5 = 26,1600 , Year6 = 3,4000

Year1= 12,000 , Year2=28,960 , Year3= 26,120 , Year4= 24,160 , Year5 = 26,160 , Year6 = 3,400

12.9%

3 years, 1 month and 22 days

$151,460

year1= (10,000) , Year2=(20,000) , Year3= (30,000) , Year4= (30,000) , Year5 = (30,000)

$100,000 

year1= 10,000 , Year2=20,000 , Year3= 30,000 , Year4= 30,000 , Year5 = 30,000

year1= 19,000 , Year2=12,000 , Year3= 12,000 , Year4= 5,000 , Year5 =0 , Year6 = 0

22.06%

8.76%

$87,800

$48,000

 $22,800

12.3%

$143,103.98

$20,800 

$146,460

year1= 34,000 , Year2=54,400 , Year3= 32,300 , Year4= 20,400 , Year5 = 20,400 , Year6 = 8,500

The replacement decision should be accepted

16.20%

$175,640

$85,800

4 years, 1 month and 13 days

9.45%

The replacement decision should be rejected

year1= 15,000 , Year2=42,400 , Year3= 20,300 , Year4= 15,400 , Year5 = 20,400 , Year6 = 8,500

3 years and 14months

22.73%

$72,000

$67,800

9.39%

$92,800

$50,304

($50,303.98)

5.67%

 Calculate the book value of the existing asset being replaced. 



 

Year1= 12,400 , Year2=28,960 , Year3= 36,120 , Year4= 24,960 , Year5 = 26,1600 , Year6 = 3,4000

Year1= 12,000 , Year2=28,960 , Year3= 26,120 , Year4= 24,160 , Year5 = 26,160 , Year6 = 3,400

12.9%

3 years, 1 month and 22 days

$151,460

year1= (10,000) , Year2=(20,000) , Year3= (30,000) , Year4= (30,000) , Year5 = (30,000)

$100,000 

year1= 10,000 , Year2=20,000 , Year3= 30,000 , Year4= 30,000 , Year5 = 30,000

year1= 19,000 , Year2=12,000 , Year3= 12,000 , Year4= 5,000 , Year5 =0 , Year6 = 0

22.06%

8.76%

$87,800

$48,000

 $22,800

12.3%

$143,103.98

$20,800 

$146,460

year1= 34,000 , Year2=54,400 , Year3= 32,300 , Year4= 20,400 , Year5 = 20,400 , Year6 = 8,500

The replacement decision should be accepted

16.20%

$175,640

$85,800

4 years, 1 month and 13 days

9.45%

The replacement decision should be rejected

year1= 15,000 , Year2=42,400 , Year3= 20,300 , Year4= 15,400 , Year5 = 20,400 , Year6 = 8,500

3 years and 14months

22.73%

$72,000

$67,800

9.39%

$92,800

$50,304

($50,303.98)

5.67%

 Calculate the tax effect from the sale of the existing asset. 



 

Year1= 12,400 , Year2=28,960 , Year3= 36,120 , Year4= 24,960 , Year5 = 26,1600 , Year6 = 3,4000

Year1= 12,000 , Year2=28,960 , Year3= 26,120 , Year4= 24,160 , Year5 = 26,160 , Year6 = 3,400

12.9%

3 years, 1 month and 22 days

$151,460

year1= (10,000) , Year2=(20,000) , Year3= (30,000) , Year4= (30,000) , Year5 = (30,000)

$100,000 

year1= 10,000 , Year2=20,000 , Year3= 30,000 , Year4= 30,000 , Year5 = 30,000

year1= 19,000 , Year2=12,000 , Year3= 12,000 , Year4= 5,000 , Year5 =0 , Year6 = 0

22.06%

8.76%

$87,800

$48,000

 $22,800

12.3%

$143,103.98

$20,800 

$146,460

year1= 34,000 , Year2=54,400 , Year3= 32,300 , Year4= 20,400 , Year5 = 20,400 , Year6 = 8,500

The replacement decision should be accepted

16.20%

$175,640

$85,800

4 years, 1 month and 13 days

9.45%

The replacement decision should be rejected

year1= 15,000 , Year2=42,400 , Year3= 20,300 , Year4= 15,400 , Year5 = 20,400 , Year6 = 8,500

3 years and 14months

22.73%

$72,000

$67,800

9.39%

$92,800

$50,304

($50,303.98)

5.67%

 Calculate the initial investment required for the new asset. 



 

Year1= 12,400 , Year2=28,960 , Year3= 36,120 , Year4= 24,960 , Year5 = 26,1600 , Year6 = 3,4000

Year1= 12,000 , Year2=28,960 , Year3= 26,120 , Year4= 24,160 , Year5 = 26,160 , Year6 = 3,400

12.9%

3 years, 1 month and 22 days

$151,460

year1= (10,000) , Year2=(20,000) , Year3= (30,000) , Year4= (30,000) , Year5 = (30,000)

$100,000 

year1= 10,000 , Year2=20,000 , Year3= 30,000 , Year4= 30,000 , Year5 = 30,000

year1= 19,000 , Year2=12,000 , Year3= 12,000 , Year4= 5,000 , Year5 =0 , Year6 = 0

22.06%

8.76%

$87,800

$48,000

 $22,800

12.3%

$143,103.98

$20,800 

$146,460

year1= 34,000 , Year2=54,400 , Year3= 32,300 , Year4= 20,400 , Year5 = 20,400 , Year6 = 8,500

The replacement decision should be accepted

16.20%

$175,640

$85,800

4 years, 1 month and 13 days

9.45%

The replacement decision should be rejected

year1= 15,000 , Year2=42,400 , Year3= 20,300 , Year4= 15,400 , Year5 = 20,400 , Year6 = 8,500

3 years and 14months

22.73%

$72,000

$67,800

9.39%

$92,800

$50,304

($50,303.98)

5.67%

 Calculate the incremental earnings before depreciation and taxes. 



 

Year1= 12,400 , Year2=28,960 , Year3= 36,120 , Year4= 24,960 , Year5 = 26,1600 , Year6 = 3,4000

Year1= 12,000 , Year2=28,960 , Year3= 26,120 , Year4= 24,160 , Year5 = 26,160 , Year6 = 3,400

12.9%

3 years, 1 month and 22 days

$151,460

year1= (10,000) , Year2=(20,000) , Year3= (30,000) , Year4= (30,000) , Year5 = (30,000)

$100,000 

year1= 10,000 , Year2=20,000 , Year3= 30,000 , Year4= 30,000 , Year5 = 30,000

year1= 19,000 , Year2=12,000 , Year3= 12,000 , Year4= 5,000 , Year5 =0 , Year6 = 0

22.06%

8.76%

$87,800

$48,000

 $22,800

12.3%

$143,103.98

$20,800 

$146,460

year1= 34,000 , Year2=54,400 , Year3= 32,300 , Year4= 20,400 , Year5 = 20,400 , Year6 = 8,500

The replacement decision should be accepted

16.20%

$175,640

$85,800

4 years, 1 month and 13 days

9.45%

The replacement decision should be rejected

year1= 15,000 , Year2=42,400 , Year3= 20,300 , Year4= 15,400 , Year5 = 20,400 , Year6 = 8,500

3 years and 14months

22.73%

$72,000

$67,800

9.39%

$92,800

$50,304

($50,303.98)

5.67%

 Calculate the incremental depreciation. 



 

Year1= 12,400 , Year2=28,960 , Year3= 36,120 , Year4= 24,960 , Year5 = 26,1600 , Year6 = 3,4000

Year1= 12,000 , Year2=28,960 , Year3= 26,120 , Year4= 24,160 , Year5 = 26,160 , Year6 = 3,400

12.9%

3 years, 1 month and 22 days

$151,460

year1= (10,000) , Year2=(20,000) , Year3= (30,000) , Year4= (30,000) , Year5 = (30,000)

$100,000 

year1= 10,000 , Year2=20,000 , Year3= 30,000 , Year4= 30,000 , Year5 = 30,000

year1= 19,000 , Year2=12,000 , Year3= 12,000 , Year4= 5,000 , Year5 =0 , Year6 = 0

22.06%

8.76%

$87,800

$48,000

 $22,800

12.3%

$143,103.98

$20,800 

$146,460

year1= 34,000 , Year2=54,400 , Year3= 32,300 , Year4= 20,400 , Year5 = 20,400 , Year6 = 8,500

The replacement decision should be accepted

16.20%

$175,640

$85,800

4 years, 1 month and 13 days

9.45%

The replacement decision should be rejected

year1= 15,000 , Year2=42,400 , Year3= 20,300 , Year4= 15,400 , Year5 = 20,400 , Year6 = 8,500

3 years and 14months

22.73%

$72,000

$67,800

9.39%

$92,800

$50,304

($50,303.98)

5.67%

 Calculate the incremental after-tax cash flow for years t = 0 through t = 5. 



 

Year1= 12,400 , Year2=28,960 , Year3= 36,120 , Year4= 24,960 , Year5 = 26,1600 , Year6 = 3,4000

Year1= 12,000 , Year2=28,960 , Year3= 26,120 , Year4= 24,160 , Year5 = 26,160 , Year6 = 3,400

12.9%

3 years, 1 month and 22 days

$151,460

year1= (10,000) , Year2=(20,000) , Year3= (30,000) , Year4= (30,000) , Year5 = (30,000)

$100,000 

year1= 10,000 , Year2=20,000 , Year3= 30,000 , Year4= 30,000 , Year5 = 30,000

year1= 19,000 , Year2=12,000 , Year3= 12,000 , Year4= 5,000 , Year5 =0 , Year6 = 0

22.06%

8.76%

$87,800

$48,000

 $22,800

12.3%

$143,103.98

$20,800 

$146,460

year1= 34,000 , Year2=54,400 , Year3= 32,300 , Year4= 20,400 , Year5 = 20,400 , Year6 = 8,500

The replacement decision should be accepted

16.20%

$175,640

$85,800

4 years, 1 month and 13 days

9.45%

The replacement decision should be rejected

year1= 15,000 , Year2=42,400 , Year3= 20,300 , Year4= 15,400 , Year5 = 20,400 , Year6 = 8,500

3 years and 14months

22.73%

$72,000

$67,800

9.39%

$92,800

$50,304

($50,303.98)

5.67%

  Calculate the terminal cash flow, if you know that the existing machine was fully depreciated and sold at $40,000, while the proposed machine sold at $190,000 after 4 years from the date of purchase. 



 

Year1= 12,400 , Year2=28,960 , Year3= 36,120 , Year4= 24,960 , Year5 = 26,1600 , Year6 = 3,4000

Year1= 12,000 , Year2=28,960 , Year3= 26,120 , Year4= 24,160 , Year5 = 26,160 , Year6 = 3,400

12.9%

3 years, 1 month and 22 days

$151,460

year1= (10,000) , Year2=(20,000) , Year3= (30,000) , Year4= (30,000) , Year5 = (30,000)

$100,000 

year1= 10,000 , Year2=20,000 , Year3= 30,000 , Year4= 30,000 , Year5 = 30,000

year1= 19,000 , Year2=12,000 , Year3= 12,000 , Year4= 5,000 , Year5 =0 , Year6 = 0

22.06%

8.76%

$87,800

$48,000

 $22,800

12.3%

$143,103.98

$20,800 

$146,460

year1= 34,000 , Year2=54,400 , Year3= 32,300 , Year4= 20,400 , Year5 = 20,400 , Year6 = 8,500

The replacement decision should be accepted

16.20%

$175,640

$85,800

4 years, 1 month and 13 days

9.45%

The replacement decision should be rejected

year1= 15,000 , Year2=42,400 , Year3= 20,300 , Year4= 15,400 , Year5 = 20,400 , Year6 = 8,500

3 years and 14months

22.73%

$72,000

$67,800

9.39%

$92,800

$50,304

($50,303.98)

5.67%

 Calculate the firm's weighted average cost of capital assuming the firm has exhausted all retained earnings.



 

Year1= 12,400 , Year2=28,960 , Year3= 36,120 , Year4= 24,960 , Year5 = 26,1600 , Year6 = 3,4000

Year1= 12,000 , Year2=28,960 , Year3= 26,120 , Year4= 24,160 , Year5 = 26,160 , Year6 = 3,400

12.9%

3 years, 1 month and 22 days

$151,460

year1= (10,000) , Year2=(20,000) , Year3= (30,000) , Year4= (30,000) , Year5 = (30,000)

$100,000 

year1= 10,000 , Year2=20,000 , Year3= 30,000 , Year4= 30,000 , Year5 = 30,000

year1= 19,000 , Year2=12,000 , Year3= 12,000 , Year4= 5,000 , Year5 =0 , Year6 = 0

22.06%

8.76%

$87,800

$48,000

 $22,800

12.3%

$143,103.98

$20,800 

$146,460

year1= 34,000 , Year2=54,400 , Year3= 32,300 , Year4= 20,400 , Year5 = 20,400 , Year6 = 8,500

The replacement decision should be accepted

16.20%

$175,640

$85,800

4 years, 1 month and 13 days

9.45%

The replacement decision should be rejected

year1= 15,000 , Year2=42,400 , Year3= 20,300 , Year4= 15,400 , Year5 = 20,400 , Year6 = 8,500

3 years and 14months

22.73%

$72,000

$67,800

9.39%

$92,800

$50,304

($50,303.98)

5.67%

  Calculate the cost of debt 



 

Year1= 12,400 , Year2=28,960 , Year3= 36,120 , Year4= 24,960 , Year5 = 26,1600 , Year6 = 3,4000

Year1= 12,000 , Year2=28,960 , Year3= 26,120 , Year4= 24,160 , Year5 = 26,160 , Year6 = 3,400

12.9%

3 years, 1 month and 22 days

$151,460

year1= (10,000) , Year2=(20,000) , Year3= (30,000) , Year4= (30,000) , Year5 = (30,000)

$100,000 

year1= 10,000 , Year2=20,000 , Year3= 30,000 , Year4= 30,000 , Year5 = 30,000

year1= 19,000 , Year2=12,000 , Year3= 12,000 , Year4= 5,000 , Year5 =0 , Year6 = 0

22.06%

8.76%

$87,800

$48,000

 $22,800

12.3%

$143,103.98

$20,800 

$146,460

year1= 34,000 , Year2=54,400 , Year3= 32,300 , Year4= 20,400 , Year5 = 20,400 , Year6 = 8,500

The replacement decision should be accepted

16.20%

$175,640

$85,800

4 years, 1 month and 13 days

9.45%

The replacement decision should be rejected

year1= 15,000 , Year2=42,400 , Year3= 20,300 , Year4= 15,400 , Year5 = 20,400 , Year6 = 8,500

3 years and 14months

22.73%

$72,000

$67,800

9.39%

$92,800

$50,304

($50,303.98)

5.67%

 Calculate the cost of preferred stock



 

Year1= 12,400 , Year2=28,960 , Year3= 36,120 , Year4= 24,960 , Year5 = 26,1600 , Year6 = 3,4000

Year1= 12,000 , Year2=28,960 , Year3= 26,120 , Year4= 24,160 , Year5 = 26,160 , Year6 = 3,400

12.9%

3 years, 1 month and 22 days

$151,460

year1= (10,000) , Year2=(20,000) , Year3= (30,000) , Year4= (30,000) , Year5 = (30,000)

$100,000 

year1= 10,000 , Year2=20,000 , Year3= 30,000 , Year4= 30,000 , Year5 = 30,000

year1= 19,000 , Year2=12,000 , Year3= 12,000 , Year4= 5,000 , Year5 =0 , Year6 = 0

22.06%

8.76%

$87,800

$48,000

 $22,800

12.3%

$143,103.98

$20,800 

$146,460

year1= 34,000 , Year2=54,400 , Year3= 32,300 , Year4= 20,400 , Year5 = 20,400 , Year6 = 8,500

The replacement decision should be accepted

16.20%

$175,640

$85,800

4 years, 1 month and 13 days

9.45%

The replacement decision should be rejected

year1= 15,000 , Year2=42,400 , Year3= 20,300 , Year4= 15,400 , Year5 = 20,400 , Year6 = 8,500

3 years and 14months

22.73%

$72,000

$67,800

9.39%

$92,800

$50,304

($50,303.98)

5.67%

 Calculate the cost of common stock 



 

Year1= 12,400 , Year2=28,960 , Year3= 36,120 , Year4= 24,960 , Year5 = 26,1600 , Year6 = 3,4000

Year1= 12,000 , Year2=28,960 , Year3= 26,120 , Year4= 24,160 , Year5 = 26,160 , Year6 = 3,400

12.9%

3 years, 1 month and 22 days

$151,460

year1= (10,000) , Year2=(20,000) , Year3= (30,000) , Year4= (30,000) , Year5 = (30,000)

$100,000 

year1= 10,000 , Year2=20,000 , Year3= 30,000 , Year4= 30,000 , Year5 = 30,000

year1= 19,000 , Year2=12,000 , Year3= 12,000 , Year4= 5,000 , Year5 =0 , Year6 = 0

22.06%

8.76%

$87,800

$48,000

 $22,800

12.3%

$143,103.98

$20,800 

$146,460

year1= 34,000 , Year2=54,400 , Year3= 32,300 , Year4= 20,400 , Year5 = 20,400 , Year6 = 8,500

The replacement decision should be accepted

16.20%

$175,640

$85,800

4 years, 1 month and 13 days

9.45%

The replacement decision should be rejected

year1= 15,000 , Year2=42,400 , Year3= 20,300 , Year4= 15,400 , Year5 = 20,400 , Year6 = 8,500

3 years and 14months

22.73%

$72,000

$67,800

9.39%

$92,800

$50,304

($50,303.98)

5.67%

 the growth rate of common stock dividends



 

Year1= 12,400 , Year2=28,960 , Year3= 36,120 , Year4= 24,960 , Year5 = 26,1600 , Year6 = 3,4000

Year1= 12,000 , Year2=28,960 , Year3= 26,120 , Year4= 24,160 , Year5 = 26,160 , Year6 = 3,400

12.9%

3 years, 1 month and 22 days

$151,460

year1= (10,000) , Year2=(20,000) , Year3= (30,000) , Year4= (30,000) , Year5 = (30,000)

$100,000 

year1= 10,000 , Year2=20,000 , Year3= 30,000 , Year4= 30,000 , Year5 = 30,000

year1= 19,000 , Year2=12,000 , Year3= 12,000 , Year4= 5,000 , Year5 =0 , Year6 = 0

22.06%

8.76%

$87,800

$48,000

 $22,800

12.3%

$143,103.98

$20,800 

$146,460

year1= 34,000 , Year2=54,400 , Year3= 32,300 , Year4= 20,400 , Year5 = 20,400 , Year6 = 8,500

The replacement decision should be accepted

16.20%

$175,640

$85,800

4 years, 1 month and 13 days

9.45%

The replacement decision should be rejected

year1= 15,000 , Year2=42,400 , Year3= 20,300 , Year4= 15,400 , Year5 = 20,400 , Year6 = 8,500

3 years and 14months

22.73%

$72,000

$67,800

9.39%

$92,800

$50,304

($50,303.98)

5.67%

 Compute the payback period for these projects 



 

Year1= 12,400 , Year2=28,960 , Year3= 36,120 , Year4= 24,960 , Year5 = 26,1600 , Year6 = 3,4000

Year1= 12,000 , Year2=28,960 , Year3= 26,120 , Year4= 24,160 , Year5 = 26,160 , Year6 = 3,400

12.9%

3 years, 1 month and 22 days

$151,460

year1= (10,000) , Year2=(20,000) , Year3= (30,000) , Year4= (30,000) , Year5 = (30,000)

$100,000 

year1= 10,000 , Year2=20,000 , Year3= 30,000 , Year4= 30,000 , Year5 = 30,000

year1= 19,000 , Year2=12,000 , Year3= 12,000 , Year4= 5,000 , Year5 =0 , Year6 = 0

22.06%

8.76%

$87,800

$48,000

 $22,800

12.3%

$143,103.98

$20,800 

$146,460

year1= 34,000 , Year2=54,400 , Year3= 32,300 , Year4= 20,400 , Year5 = 20,400 , Year6 = 8,500

The replacement decision should be accepted

16.20%

$175,640

$85,800

4 years, 1 month and 13 days

9.45%

The replacement decision should be rejected

year1= 15,000 , Year2=42,400 , Year3= 20,300 , Year4= 15,400 , Year5 = 20,400 , Year6 = 8,500

3 years and 14months

22.73%

$72,000

$67,800

9.39%

$92,800

$50,304

($50,303.98)

5.67%

  Compute the NPV using calculated WACC 



 

Year1= 12,400 , Year2=28,960 , Year3= 36,120 , Year4= 24,960 , Year5 = 26,1600 , Year6 = 3,4000

Year1= 12,000 , Year2=28,960 , Year3= 26,120 , Year4= 24,160 , Year5 = 26,160 , Year6 = 3,400

12.9%

3 years, 1 month and 22 days

$151,460

year1= (10,000) , Year2=(20,000) , Year3= (30,000) , Year4= (30,000) , Year5 = (30,000)

$100,000 

year1= 10,000 , Year2=20,000 , Year3= 30,000 , Year4= 30,000 , Year5 = 30,000

year1= 19,000 , Year2=12,000 , Year3= 12,000 , Year4= 5,000 , Year5 =0 , Year6 = 0

22.06%

8.76%

$87,800

$48,000

 $22,800

12.3%

$143,103.98

$20,800 

$146,460

year1= 34,000 , Year2=54,400 , Year3= 32,300 , Year4= 20,400 , Year5 = 20,400 , Year6 = 8,500

The replacement decision should be accepted

16.20%

$175,640

$85,800

4 years, 1 month and 13 days

9.45%

The replacement decision should be rejected

year1= 15,000 , Year2=42,400 , Year3= 20,300 , Year4= 15,400 , Year5 = 20,400 , Year6 = 8,500

3 years and 14months

22.73%

$72,000

$67,800

9.39%

$92,800

$50,304

($50,303.98)

5.67%

 Determine whether the replacement decision should be accepted or not?

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