Fluffy Cupcake Company (FCC) is considering expanding by buying a new machine to add to its existing bank of equipment used for the business. Cost of the machine is $42,000 with a 10-yr useful life with expectation of zero terminal disposal value.

This investment is expected to increase the cash revenues by $23,000 annually during the life of the asset and will have annual operating expense outlay of $18,000 per annum.

FCC cost of capital is 6% and the company has no existing debt and their corporate tax rate is 30%


Should the proposal be accepted by FCC?



One of FCC’s competitors Brownie Cake Company (BCC) is also interested in installing the same machine and projects the identical financial inflows of $23,000 per annum. However it has a different structure as follows:

Equity – 75 %

Debt – 25%

Cost of borrowing – 7.5%

Cost of capital – 5%

Corporate tax rate – 25%

Operating cost for the machine would be $15,000 per annum


Should the proposal be accepted by BCC?



It was discovered after further analysis that the cash flows during the project life would vary as follows:

Income will increase by 2% each year during the life of the project

Cost will increase by 1.25% each year

In year 6 a special maintenance adjustment will have to be carried out on the machine at a cost of $3,000; this will be written into the sale agreement with the manufacturers and the cost cannot be avoided by either FCC or BCC.

The machine will have a scrap value of 5% of cost after 10 years; the manufacturer has a recycling plant that buys old machines for immediate cash.



Should the proposal be accepted by FCC and BCC after these changes?




Sharp Shark Financing Ltd is offering a lease proposal to either company which requires payment of $4,620 each year for the 10 year investment period. Using the figures from the initial proposal ONLY evaluate the offer from Sharp Shark and calculate whether or not this is a viable option to either FCC or BCC.

Click on Buy Solution and make payment. All prices shown above are in USD. Payment supported in all currencies.

After making payment, solution is sent within 2 to 5 minutes on your Email ID. But it may take up to 1 hour in case of high load on server. Solution is available in Word or Excel format unless otherwise specified.


If you question is slightly different from the given above, please contact us at with your version of question.