Reference no: EM13529074

Question 1:

Pierre Imports is evaluating the proposed acquisition of new equipment at a cost of $90,000. In addition the equipment would require modifications at a cost of $10,000 plus shipping costs of $2,000. The equipment falls into the MACRS 3-year class, and will be sold after 3 years for $35,000. The equipment would require increased inventory of 6,000. The equipment is expected to save the company $35,000 per year in before-tax operating costs. The company's marginal tax rate is 30 percent and its cost of capital is 11 percent.

a. What is the cash outflow at Time 0?

 

Cost of milling machine	$90,000
Modifications to machine	$                          10,000
Shipping costs	$                            2,000
MACRS 3 year class	0.3333	0.4445	0.1481	0.0741
Salvage after 3 years	$                          35,000
Increased inventory	$                            6,000
Savings per year	$                          35,000
Tax rate	30%

b. Calculate the net operating cash flows in years 1, 2, and 3?

c. Calculate the non-operating terminal year cash flow.

d. Calculate net present value. Should the machine be purchased?

Question 2. Andrews Corporation plans a $10 million expansion. The firm wants to maintain a 45 percent debt-to-total-assets ratio in its capital structure. It also wants to maintain its past dividend policy of distributing 30 percent of last year's net income. Last year, net income was $4 million.

a. Calculate the amount of external equity needed.

b. If the company changed to a residual dividend policy, how much external equity will it need?

c. Is the company likely to change to a residual policy? Why or why not?