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Byron Bobsleds Ltd. has just refurbished its t...

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Byron Bobsleds Ltd. has just refurbished its track at a cost of $500,000. The company is considering 15 new and improved sleds to capture increased interest in this activity. The new bobsleds will cost $21,000 each and have a useful life of 8 years at which time they can be salvaged for an expected $6,000 each. Five [5] old bobsleds will be retired immediately and salvaged for $2,500 each. The new bobsleds will create the excitement to generate an additional 825 rides annually at $125 each. The additional runs down the track will create an incremental annual maintenance cost of $25,000. The inventory and accounts receivable investment will total 5% of sales. Byron has a CCA rate of 20% and a tax rate of 28%. Annual interest charges on debt to finance this project will be $10,560. The current capital structure is 40% debt, 60% equity and this will be maintained. The debt is at 8%. The current overall cost of capital is 12%. a. Compute the NPV of this investment decision. Should the bobsleds be purchased [12 marks] b. How should you adjust for inflation in your analysis [2 marks] III. Lease versus borrow to purchase (6 marks) Sanders Limited is considering whether to lease its equipment as an alternative to borrowing to purchase it. The equipment will cost $170,000. This amount can be borrowed from a local bank at 6% interest with annual payments amortized over 4 years. Payments would be at the end of the year. The CCA rate on this equipment would be 30%, and the expected salvage at the end of 4 years is $25,000. Alternatively, lease payments of $48,000 could be made each year for 4 years, with the first payment due immediately. Sanders? cost of capital is 11%, and its tax rate is 30%. Required: Should Sanders lease or borrow to purchase?

 

Paper#5466 | Written in 18-Jul-2015

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