Question

QUESTION 4: Alset Limited is considering replacing the old widget maker with the new one at its plant in Windsor. The old widget maker has a current market value of $20,000,000 and zero salvage value after 10 years. The new widget maker will generate incremental pre tax cash flow of $15,000,000 per year for 10 years and will have zero salvage value after 10 years of use. The widget maker will be depreciated at a CCA rate of 30%. Alset Limited is in 40% tax bracket and ro = 9%. Treasury bills are yielding 2% rate of return. a. What is the maximum price Alset should be willing to pay for the widget maker? b. Suppose the price of the new widget maker is $100,000,000. Alset will issue $80,000,000 worth of debt to finance the purchase. Under the loan agreement Alset will pay 5% interest annually on the outstanding balance. Alset will also make year end principal payments of $20,000,000 per year, completely retiring the issue at the end of 4th year. Ignore cost of financial distress and floatation cost. Determine APV. c. To encourage Alset to replace old widget maker, Ontario Government is willing to lend $80,000,000 at an interest rate of 2% per year for 3 years. Principal to be repaid at the end of 3rd year. Now what is the maximum price Alset would be willing to pay for the widget maker?

Answer 1

$olution cash flow = $15,000,000 tax bracket - 40% Yielding gate = 2%. CCA sale -30% cursent market = $20,000,000 Now, calculating the marimon poice is ( each year Incremental cash flow = $15,000,000 + 60% - 15,000,006 +60 Too = 15100010 460 = $9000000 pactor Annuity of 92 for 10 years 18 - 6.4176 8 = $9000000 x 6:417 - $57758900 porce Marimon A PV 88 PV of ay hout b Now, calculating Flow cash inflow - Adjusted present calve CAPV) = PV of pv of incremental Cash Flows = $57758 400 amount of debt $ 80000.000 $137,758,400 Scanned with CamScanner

PV of cash out flows : be paid En each year interest to 100 >$80,000,000 x 5% » $ 80,000,000 x 5 - $400oooo Enterest Cost = $4000000 x 60% - $40.00000 x 60 Post tax = $2400000 out flow of funds En each year interest + principle repay men -) QU00000 + 20000000 - $22000000 : PV of out flouge - $ 22400000 x PVAF (994) = $72569 725 + $100000000 - $172569729 APV - $137758400 - 172569721 APV = - $34811325 the maximum price 6 Now, calculating $80000000 x 2% $1600000 860% - $1600000 pa (before tax = 8960000 pa (after tax cash flow is Now, discountity the Scanned with CamScanner

out floog ☺ - 960000, 960000 (1009)' (1-og) 960000 + (1:093 80000000 (1.09)3 out FLOW) - $6420472) porejent Calue of Enflasy = $57758400 +$ 80000OCO = $137758400 Hence, maximum amoune can be paid -> $137758400 - $642047a) => $735536797 Scanned with CamScanner