Sheridan Shovel Corporation has decided to bid for a contract to supply shovels to the Honduran Army. The Honduran Army intends tobuy 1,000 shovels per year for the next 3 years. To supply these shovels, Sheridan will have to acquire manufacturing equipment at acost of $160,000. This equipment will be depreciated on a straight-line basis over its five-year lifetime. At the end of the third year,Sheridan can sell the equipment for exactly its book value ($64,000). Additional fixed costs will be $40,000 per year, and variable costswill be $3 per shovel. An additional investment of $24,000 in net working capital will be required when the project is initiated. Thisinvestment will be recovered at the end of the third year. Sheridan Shovel has a 27 percent marginal tax rate and a 15 percent requiredrate of return on the project. What is the lowest possible per shovel price that Sheridan can offer for the contract and still create valuefor its stockholders? (Round Round CF Opns answer to O decimal places, e.g. 5,275 and final answer to 2 decimal places, e.g. 15.25.)Shovel price$

The point at which NPV is zero and present value of cash flow is equal to initial investment of…

Answered: Sheridan Shovel Corporation has decided…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter19: Lease And Intermediate-term Financing

Section: Chapter Questions

Problem 2P

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The Spartan Technology Company has a proposed contract with the Digital Systems Company of Michigan. The initial investment in land and equipment will be $320,000. Of this amount, $260,000 is subject to five-year MACRS depreciation. The balance is in nondepreciable property. The contract covers six years; at the end of six years, the nondepreciable assets will be sold for $60,000. The depreciated assets will have zero resale value. Use Table 12-12. The contract will require an additional investment of $59,000 in working capital at the beginning of the first year and, of this amount, $39,000 will be returned to the Spartan Technology Company after six years. The investment will produce $91,000 in income before depreciation and taxes for each of the six years. The corporation is in a 25 percent tax bracket and has a 8 percent cost of capital. a. Calculate the net present value. (Do not round intermediate calculations and round your answer to 2 decimal places.) X Answer is complete but…
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WHC will need to purchase additional necessary equipment, which will cost $77 million. To get the equipment in running order, there would be a $2 million shipping fee and a $3 million installation charge. The equipment will be depreciated to zero on a straight-line basis over its economic life of 15 years. The contract runs for only eight years. At that time the coal from the site will be entirely mined. The company feels that the equipment can be sold for 10 percent of its initial purchase price in eight years. Instead of purchasing the equipment, your team, being experienced consultants, wishes to propose to WHC that they have another option which is leasing it. Coincidently, your other client, Resolute Leasing Limited (RLL), may be a suitable lessor. On discussions, the executives at RLL have asked you to prepare a lease quotation that could be forwarded to WHC for consideration. For the purpose, RLL has provided the following information: • RLL can get a 20% discount on the…
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