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Please show formulas and calculations and not just results and numbers, and explain rationale for answers. Whenever applicable, interest is compounded annually and payments occur at the end of the period. Face value for bonds is $1000.
Premium Products is considering a new project that requires an investment of $24 million in machinery. This is expected to produce sales of $70 million per year for 3 years. Operating expenses are 80% of sales. The machinery will be fully depreciated to a zero-book value over 3 years using straight-line depreciation. There is no salvage value. There is an initial investment of $3 million in net operating working capital. At the end of year 3, the firm gets $2 million returned in net operating working capital. There is no other investment in net operating working capital. The tax rate is 40%. The unlevered cost of capital is 11%.
1. Calculate the base-case NPV (net present value).
2. Use goal seek on the base-case NPV to find out how low sales can go before they break-even.
3. The project will be financed with $10,000,000 in bonds; the remaining funds will come from retained earnings. The bonds have a 3-year life, an annual coupon rate of 6% and a yield of 6%. Find the adjusted present value (APV) using the original base-case NPV from part a.
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Which method(s) should you use to evaluate these two projects?
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The earnings, dividends, and common stock price of Shelby Inc. are expected to grow at 5% per year in the future. Shelby's common stock sells for $26.25 per share, its last dividend was $1.80, and the company will pay a dividend of $1.89 at the end o..
Stacie wants to buy a new car. She has the option of buying the car for $35,000 with no money down and 1% financing for three years or get a cash discount of $4,000. She car get financing at the local bank for 4% per year. Compute her total expenses ..
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