UNIK Autos is considering replacing the old assembly line with the new one at their Unik Mini Manufacturing Plant in Tro

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UNIK Autos is considering replacing the old assembly line with
the new one at their Unik Mini
Manufacturing Plant in Trois Riviere, Quebec. The old assembly line
has a current market value
of $10,000,000 and zero salvage value after 10 years. The new
assembly line will generate
incremental pre tax cash flow of $5,000,000 per year for 10 years
and will have zero salvage
value after 10 years of use. The assembly line will be depreciated
at a CCA rate of 30%. UNIK
Autos is in 40% tax bracket and r0 = 10%. Treasury bills are
yielding 3% rate of return.
a. What is the maximum price UNIK should be willing to pay for the
assembly line?
b. Suppose the price of the new assembly line is $40,000,000. UNIK
will issue $20,000,000
worth of debt to finance the purchase. Under the loan agreement
UNIK will pay 6% interest
annually on the outstanding balance. UNIK will also make year end
principal payments of
$5,000,000 per year, completely retiring the issue at the end of
4th year. Ignore cost of
financial distress and issue cost. Determine APV.
c. To encourage UNIK to replace old assembly line, Quebec
Government is willing to lend
$20,000,000 at an interest rate of 2% per year for 5 years.
Principal to be repaid at the end of
5th year. Now what is the maximum price UNIK would be willing to
pay for the assembly
line?