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Goltra Clinic is considering investing in new heart-monitoring equipment. It has two options: Option A would have an initial lower cost but would require a significant expenditure for rebuilding after 4 years. Option B would require no rebuilding expenditure, but its maintenance costs would be higher. Since the Option B machine is of initial higher quality, it is expected to have a salvage value at the end of its useful life. The following estimates were made of the cash flows. The company’s cost of capital is 7%. Option A Option B Initial cost $177,000 $244,000 Annual cash inflows $72,600 $80,200 Annual cash outflows $30,200 $25,900 Cost to rebuild (end of year 4) $51,800 $0 Salvage value $0 $8,400 Estimated useful life 7 years 7 years a. Compute the (1) net present value, (2) profitability index, and (3) internal rate of return for each option. (Hint: To solve for internal rate of return, experiment with alternative discount rates to arrive at a net present value of zero.) (If the net present value is negative, use either a negative sign preceding the number eg -45 or parentheses eg (45). Round answers for present value to 0 decimal places, e.g. 125. Round profitability index to 2 decimal places, e.g. 10.50. Round answers for IRR to 0 decimal places, e.g. 12. Round Discount Factor to 5 decimal places.)
Assume you purchase 100 shares of stock at $44 per share and wish to hedge your position by writing a 100-share call option on your holdings. The option has a 40 strike price and a premium of 8.50. what will be the overall dollar gain or loss on this..
You just finished analyzing a five-year capital investment proposal that has a NPV of $250,000. Suddenly, you get a frantic call from the VP of Operations saying the initial investment in equipment will be $275,000 more than first thought, but the ch..
A self-employed person deposits $3,000 annually in a retirement account (called a Keogh account) that earns 8 percent. How much will be in the account when the individual retires at the age of 65 if the savings program starts when the person is age 4..
During the year, the firm sold assets with a total book value of $13,600 and also recorded $14,800 in depreciation expense. How much did the company spend to buy new fixed assets?
A company wants to replace a machine with a modern, more efficient model with a longer life expectancy. The equipment requires an initial investment of $600,000 in Year 0. The firm's WACC is 16% and the risk-free rate is 6%. The analyst develops the ..
Lady Ann products put together makeup packages to be sold to department stores. The firm sells these packages for $8.00 each; variable costs are 75% of the retail price. Fixed costs are $375,000 a year. Determine the break even point in #of units. De..
Felicia & Fred’s executive team has noted the customer feedback regarding the holiday purse offering and has decided to expand its product line into handbags as well. Define the internal growth rate and the sustainable growth rate. What consideration..
Dahlia Enterprises needs someone to supply it with 122,000 cartons of machine screws per year to support its manufacturing needs over the next five years, and you’ve decided to bid on the contract. It will cost you $890,000 to install the equipment n..
Which of the following statements regarding arbitrage and security prices is incorrect?
Your coin collection contains 59 1952 silver dollars. If your grandparents purchased them for their face value when they were new, how much will your collection be worth when you retire in 2069, assuming they appreciate at an annual rate of 5 percent..
a. Calculate Lissa's total dividends for 2014 if its dividend payment is set to force dividends to grow at the long-run growth rate in earnings. b. Calculate Lissa's total dividends for 2014 if it continues its 2013 dividend payout ratio.
How many years will it take for $500 to grow to $1,051.82 at 10% compounded annually?
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