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Better Mousetraps has developed a new trap. The company has already conducted a feasibility study at a cost of $100,000 to ensure that the new trap would work, and it has indicated no problem. It can go into production for an initial investment in equipment of $6 million. The equipment will be depreciated straight-line over 5 years to a book value of zero. The firm estimates variable costs equal to $1.50 per trap and believes that the traps can be sold for $4 each. The fixed costs are $300,000 per year. Financing costs for the project are $250,000 per year. Sales are expected to be 1 million traps per year. The project will come to an end in 5 years, when the equipment is expected to have a market value of $1 million. The project requires an immediate increase in inventory of $500,000, an increase in accounts receivable of $300,000, and an increase in accounts payable of $600,000. This investment in net working capital will be recovered at the end of the five years. The firm's tax bracket is 35%, and the cost of capital on the project is 12%. Please calculate the project's NPV and IRR. Conduct the scenario analysis of NPV to variable costs and unit sales, letting variable cost vary from $1.2 to $1.9 per trap in increments of $0.1 per trap and letting unit sales vary from 800,000 to 1,200,000 per year in increments of 100,000 units at the same time. At least how many traps need to be sold if the project breaks even on the NPV basis? In other words, at least how many traps need to be sold that makes the NPV of the project turns positive?
Your uncle has $1,025,000 and wants to retire. He expects to live for another 25 years, and he also expects to earn 7.5% on his invested funds. How much could he withdraw at the beginning of each of the next 25 years and end up with zero in the accou..
Project K costs $62,307.93, its expected cash inflows are $14,000 per year for 9 years, and its WACC is 11%. What is the project's IRR?
For 2012, the income statement of Precious Metals Processing reported net sales of $17,300, EBIT of $3,450, taxable income of $2,770 and net income of $1,830. The profit margin and the dividend payout ratio are held constant. Net working capital and ..
(Cost of debt) The Walgreen Corporation is contemplating a new investment that it plans to finance using one-third debt. the firm can sell new $1000 par value bonds with a 15 year maturity at a price of $951 that carry a coupon interest rate of 13.3 ..
Paradise Retailers, Inc. just paid a dividend of $2.25. Analysts expect the company's dividend to grow by 40% this year, by 25% in Year 2, and at a constant rate of 6% in Year 3 and thereafter. The required return on PRI's stock is 13.00%. What is th..
Real risk-free interest rate – 4% Constant inflation premium – 7% Maturity risk premium – 1% Default risk premium for AAA bonds – 3% Liquidity premium for long-term treasury bonds – 2 % Assume that a highly liquid market does not exist for long-term ..
App Store Co. issued 13-year bonds one year ago at a coupon rate of 6.5 percent. The bonds make semi-annual payments. If the YTM on these bonds is 5.4 percent, what is the current bond price?
An all-equity firm has a beta of .98. The firm is evaluating a project that will increase the output of the firm's existing product. The market risk premium is 7.3 percent and the risk-free rate is 3.4 percent. What discount rate should be assigned t..
A call option on an asset has a delta of 0.3. A trader has sold 3,000 options and wants to create a delta-neutral position. Should the trader take a long or short position in the asset? How many units of the asset should be bought or sold?
We have 10,000 common shares of Procter and Gamble, each of which we bought for $38, and we sell covered calls on those shares. The premium is $1.5, and the strike price is $45 per share. Compute the rate of return for both the seller and the buyer o..
Indirect exchange rate. If the direct exchange rate of the euro is worth £0.685, what is the indirect rate of the euro? Note that the pound is the home currency.
If in the opinion of a given investor a stock's expected return exceeds its required return, this suggests that the investor thinks
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