Sunday, January 15, 2012

Finance problem, pls help!?

Your company wants to bid on a contract to sell 10 aircrafts per year for five years. To manufacture the aircrafts, your company needs to purchase specialized equipment. The cost of this equipment is $1.6 million with a salvage value of $800,000 after five years. It has a CCA rate of 30% and it is the only et in the et cl. To finance the equipment, your company plans to issue $1 million and $600,000 of preferred shares and bonds respectively. The preferred shares pay 10% preferred dividends and the bonds pay 8% interests per year. Moreover, your company has to give up another project that requires an initial investment of $1.6 million and generates perpetual cash flows of $262,500 per year. Annual fixed costs are estimated at $700,000. Variable cost per machine is $81,500. The project requires initial net working capital of $120,000. At the end of each year of operation, 20% of the beginning balance (of that year) of the net working capital will be recovered. The ending balance at year 5 will be unrecoverable and be considered as an operating loss in year 5. The company has a 35% tax rate and requires a 15% return on the project. What is the minimum price that your company should bid per aircraft?

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