Finance Assignment | Professional Writing
University Inn is planning to replace its washing machine, a major capital expenditure for this year. General Manager, John Adams, is reviewing the follow information for decision making.
The purchase price of the new washing machine at time 0 = $10,000
Life of the new machine is 10 years (salvage value at the end of year 10 = $0)
The new machine is expected to make $25,000 in laundry revenues each year.
The expense for operating and maintaining laundry services is $23,000 each year.
Mr. Adams knows the required rate of return for similar capital investment is 24% (KE).
University Inn will finance the purchase by using 50/50 mix of debt and equity.
The cost of debt (KD) to the firm is 10%.
University Inn’s marginal tax rate is 40%.
Mr. Adams needs your assistance to determine the following for his purchase decision:
Required:
a. weighted average cost of capital (KA)
b. operating cash flow for 10 years (OCFt)
c. Net Present Value (NPV) using Present Value Annuity Factor (PVAn=10,k=12)
Should Mr. Adams make this purchase? Why?
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