A. (See Spreadsheet)
As observed in “Plastic Extrusion Equipment” under spreadsheet, Plastical exceeded the net present value of Easigo by ,960. However, Plastical has a lifespan of 10 years compared to Easigo 8 years making them incomparable that undermines Plastical’s excess. With application of equivalent annual annuities set indefinite years, Easigo overtook ,080.19 over Plastical and therefore should be chosen as the investment alternative.
B. (See Spreadsheet)
On the other hand, assuming that Maxima and Minor have yet to forecast their expected sales, Minor is the more lucrative investment in terms of lower operational costs even if they are compared under equivalent annual annuities (see “Plastic Molding Equipment”). However, acquiring Minor posted too much risk for the firm and also high installation costs. The unfamiliarity on Easigo can be aggravated by inclusion of Minor and replacement of the old system. The production capacity of Maxima is also higher than Minor. If Minor will have savings in inventory costs, such will be minimal because of its lower capacity. Therefore, Maxima should be chosen. Risk is worth paying especially if it only costs ,885.21 under equivalent annual annuities.
C. (See Spreadsheet)
Net funds will be under Option 4 are 5,000 (see “Required Net Funds”) since Easigo and Maxima models will be acquired.
D. (See Spreadsheet)
For the purpose of computing the weighted average cost of capital (WACC), funding sources is pegged at 50/50 (see “Sources of Funds”).
E. (See Spreadsheet)
The debt ratio is higher in “before restructuring” because payment of long-term debt is not yet applied which only happened in “after restructuring” (see “Debt Ratio”). The increase in market value of long-term funds in “after restructuring” also did not affect the debt ratio. The number of issues should only be changed to prevent any changes in cost equity.
F. (See Spreadsheet)
The after-tax cost of debt and equity capital is also computed. Debt capital is applied with formula while equity capital is as stated. Their weighted contribution is summed resulting to 6.5% rate which is later used in completing the net present values (NPVs) of Extrusion and Molding Investments.
G. (See Spreadsheet)
The discount rate that was used is the WACC. WACC is an effective rate because it constitutes the two main capital of the shareholder which is the debt and equity. As debt is considered cheaper source of finance as its interest expense is tax deductible expenditure, the weighing will clearly separate the debt effects of the incentive. In addition, Mace intends to finance the excess of its investment requirement with debt. Therefore, the fixed 10% equity rate is an insufficient representation of the real rate for the organization.
Credit:ivythesis.typepad.com
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