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Keystone Canning Company must replace one of its fully depreciated canning machines. Two new models are available. Machine A, having a cost of $100,000 an expected life of 3 years and before tax cash flow savings of $55,000 per year and Machine B, having a cost of $200,000, an expected life of 5years, and before tax cash flow savings of $80,000 per year. Machine A fall into the MACRS 3 -year class, while Machine B fall inti the MACRS 5-year class. Both machines will have an expected salvage value equal to their book value at the end of their expected lives. Technological improvements are expected so that any machined purchased after 3 years will provide after tax profit plus depreciation cash flow that are 20 percent higher than present cash flows. However, machinery prices in 3 years are projected to rise 2o percent, offsetting the increased cash flows, after that time, keystone projects that machinery prices and cash flows will be constant. The firm's cost of capital is 15% and its federal plus state tax rate is 40%. If the replacement is to be made, it must be done now. should Keystone replace the old machine with one of the new models? if so, with which alternatives?
Calculate the options exercise value? What is the significance of this value and why is an investor willing to pay more than the exercise value for the option
He presently has $150,000 in a retirement account that will be re-invested in a stock fund that has historically earned 10% annually (EAR) with no dividends. The plan is to add an additional $1,000 to the fund at the end of each month for 15 years. H..
Explain how each amount in the flexible budget was calculated. (Hint Examine the static budget to determine the relationship of each bud get line to volume.)
Metallica Bearings, Inc., is a young start-up company. No dividends will be paid on the stock over the next eight years, because the firm needs to plow back its earnings to fuel growth. The company will then pay a dividend of $16.50 per share 9 years..
Vasher Company planned to produce 60,000 units during 2008. Vasher allocates overhead based on units produced. At that level of production, which was used to assign the overhead to each unit, overhead costs were expected to be $210,000. Fixed costs m..
Two years ago the Krusty Krab Restaurant purchased a grill for $50,000. The owner, Eugene Krabs, has learned that a new grill is available that will cook Krabby Patties twice as fast as the existing grill. If the Krusty Krab's opportunity cost of cap..
Attitude Inc. has recently learned that it can purchase these 100 units from Device, Inc. for a total cost of $1,500. If the part were bought from Device; $1 per unit of the fixed overhead costs assigned to part Z could be totally eliminated. The unu..
You hold a portfolio consisting of a $5,000 investment in each of 20 different stocks. The portfolio beta is equal to 0.87. You have decided to sell a coal mining stock (b = 1.00) at $5,000 net and use the proceeds to buy a like amount of a mineral r..
Fun Toy Corporation estimates that there is 30% chance of a recession economy next year, a 40% chance of a normal economy next year, and a 30% chance of a boom economy next year. What is the value of Fun Toy’s debt? What is the value of Fun Toy’s equ..
If you are risk averse, you should choose an asset allocation that is:
Your firm is considering an investment that will cost $920,000 today. The investment will produce cash flows of $450,000 in year 1, $270,000 in years 2 through 4, and $200,000 in year 5. The discount rate that your firm uses for projects of this type..
What equal series of payments must be paid into a sinking fund in order to accumulate each given amount?
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