>> Financial Management
1. Hawkeye Harvesters, Inc. is engaged in a contract with the United States Government to supply farm machinery. Hawkeye’s required return is 11.2%. Their marginal tax rate is 35%. HHI must have $100,000 in working capital at the start of the project and must add $10,000 to working capital at the start of years 2, 3, 4, and 5. The project will be discontinued after 5 years with no salvage value on any equipment. What is the effect on NPV of net working capital?
There is no effect on NPV
NPV is reduced by $40,000.
NPV is reduced by $48,554.
NPV is increased by $140,000.
None of the above are within $100 of the correct answer.
2. The De Falla Threecorner Hat Co. has two mutually exclusive possible investments. In the first investment, they will have a cost of $40,000 today, and then will receive payments of $19,000 at the end of each of the next three years. The alternative investment will cost $25,000 today, and then De Falla will receive payments of $13,000 at the end of each of the next three years. At what required rate of return would the two investments have the same NPV?
3. Dublin Methodist Hospital is considering the purchase of a new rapid diagnostic machine. The system will cost $400,000 and will be depreciated straight-line to zero over its five-year life. It will be worth $50,000 at the end of that time. The hospital will save $130,000 per year in laboratory costs and will also be able to reduce their inventory of lab supplies by $50,000 upon purchasing the new machine. If the tax rate is 35%, what is the IRR for this project?