A group of recent UAI graduates decide to undertake. The project consists of the manufacture of metal plates for electric current switches. For this they must buy today a machine that costs US$100,000, with which they will be able to produce and sell 40,000 plates a year. The machine is depreciated for accounting purposes over 10 years using the straight-line depreciation method.
The net selling price of a plate is US$2.5 and the production costs of each plate are estimated to be US$1.5. The previous price and cost will remain constant over time.
The project will be evaluated over a 5-year horizon. The residual value of the machine is estimated at $30,000.
The Working Capital corresponds to 15% of sales, recovering 90% in year 5.
On the other hand, you can access a credit delivered by a State agency (Serotec) to finance part of the initial investment. It is a 5-year soft loan for an amount of US$30,000, with a constant annual fee and an annual interest rate of 2%.
The income tax rate is 25%
The bonds of the Central Bank of Chile today deliver a yield of 4% per year. The expected value of the market return of 11% per year and the Beta without debt of a similar project is 0.8
What is more convenient… the pure project or the financed project? Quantify this decision. Explain the concept behind this conclusion.
All the data detailed in the statement of the problem were obtained with the feasibility study done some time ago, which had a cost of US$2,500
