Question

Pharmos Incorporated is a Pharmaceutical Company which is considering investing in a new
production line of portable electrocardiogram (ECG) machines for its clients who suffer from
cardio vascular diseases. The company has to invest in equipment which cost $2,500,000 and falls within a MARCS depreciation of 5-years, and is expected to have a scrape value of $200,000 at the end of the project. Other than the equipment, the company needs to increase its cash and cash equivalents by $100,000, increase the level of inventory by $30,000, increase accounts receivable by $250,000 and increase account payable by $50,000 at the beginning of the project. Pharmos Incorporated expect the project to have a life of five years. The company would have to pay for transportation and installation of the equipment which has an invoice price of $450,000.

Answer 1

The company's capital consists of a Loan, Bonds, Preferred share and Common Shares.

I will find the cost of Loan component of capital.

Loan - $2,000,000 at 6%

Cost of capital of loan = 6$\%$ $\times$ (1- Tax rate)

= 6$\%$ $\times$ (1 - 25$\%$ )

= 4.50 $\%$