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Beta Leather Company Limited is considering acquiring an additional leather processing machine at a cost of Shs. 18 million. The machine is expected to generate after...

      

Beta Leather Company Limited is considering acquiring an additional leather processing
machine at a cost of Shs. 18 million. The machine is expected to generate after tax
savings of Shs. 3,600,000 per year over an eight year period.
The policy of the company is to finance capital investments with a 50% debt. The
company is able to borrow Shs. 9 million at 10% interest per annum to finance the
purchase of the machine in part. The loan principal is to be paid in equal annual
installments of Shs. 1,125,000 payable at the year end. The company's
required rate of return is 13% and the company is in the 30% tax bracket.

Required:

(i) The net present value (NPV) of the machine if fully financed by equity to
acquire the machine. Advise the management on whether to finance it by
equity or loan.

(ii) The net present value (NPV) of 'the machine with part debt financing. Would
your advice to the management in (b) (i) above change?

  

Answers


Martin
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marto answered the question on February 12, 2019 at 06:12


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