The Rustic Welt Company is proposing
Question 1
The Rustic Welt Company is proposing to replace its old welt-making machinery with more modern equipment. The new equipment costs $9 million (the existing equipment has zero salvage value). The attraction of the new machinery is that it is expected to cut manufacturing costs from their current level of $8 a welt to $4. However, as the following table shows, there is some uncertainty both about future sales and about the performance of the new machinery:
Calculate the annual cost savings of the expected scenario under the three states of nature. Assume a discount rate of 12%. RW does not pay taxes.
Question 2
You are the judge in a settlement case. You need to compute the value of a piece of land in Denver Co. The valuation is subject to the following conditions
- The settlement will take place at the end of 2019
- The current appraised value of the land on 1/1/2018 is $500.000
- The piece of land has a building on it that is uninhabitable. It takes one year to bring the building down at a cost of $100,000. That money must be paid now.
- The land can be rented in 2019 at a net proceeds of 40,000
- While rented the land cost $20,000 in property taxes
- Your real estate adviser notes that selling prices of comparable lands in Denver have declined, in real terms, at an average rate of 3% per year over the last 5 years.
- The cost of capital is 10%
- The sale of the land at the end of 2019 is subject to a 10 % commission.
What should someone pay today for this land if given the choice?
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