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Galvanized Products is considering the purchase of a new computer system for their enterprise data management system. The vendor has quoted a purchase price of $100,000. Galvanized Products is planning to borrow 1/4th of the purchase price from a bank at 15% compounded annually. The loan is to be repaid using equal annual payments over a 3-year period. The computer system is expected to last 5 years and has a salvage value of $5,000 at that time. Over the 5-year period, Galvanized Products expects to pay a technician $25,000 per year to maintain the system but will save $55,000 per year through increased efficiencies. Galvanized Products uses a MARR of 18%/year to evaluate investments. A) What is the present worth of this investment? B) What is the decision rule for judging the attractiveness of investments based on present worth? C) Should the new computer system be purchased?
A convertible security may be tendered for shares of common stock in the issuing firm. In other words, the bonds or preferred stock may be converted to common stock. Result in new capital for the firm. Do not result in new capital for the firm.
The portfolio Alpha has an expected return of 18.50% and risk of 60%. The portfolio Gamma has an expected return of 11.75% and risk of 30%. The risk of market portfolio is 40%. Assume that the Capital Asset Pricing Model holds, what are the expected ..
Suppose your local government decided to tax the interest income on its own bonds as part of an effort to rectify serious budgetary woes. If, before the change in tax status, the yields on the bonds described were below the Treasury yield of the same..
What are some of the alternative methods of investment appraisal?
For the first time in a very long time, the concept of financial risk and risk management has become a topic of concern at Presidential press conferences. Such concern has centered on esoteric financial products such as derivatives that are used to m..
Global Supply Inc has debt with both a face and a market value of $3,000. This debt has a coupon rate of 7 percent and pays interest annually. The expected earnings before interest and taxes are $1,200, the tax rate is 34 percent, and the unlevered c..
Which one of the following is the risk arising from the use of debt within the capital structure selected by a firm?
Problem 5-3 Finding the required interest rate Your parents will retire in 26 years. They currently have $340,000, and they think they will need $2,500,000 at retirement. What annual interest rate must they earn to reach their goal, assuming they don..
Your firm is contemplating the purchase of a new $600,000 computer-based order entry system. The system will be depreciated straight-line to zero over its five-year life. It will be worth $64,000 at the end of that time. You will save $230,000 before..
Fama’s Llamas has a weighted average cost of capital of 9.2 percent. The company’s cost of equity is 12 percent, and its pretax cost of debt is 7.2 percent. The tax rate is 40 percent. What is the company’s target debt−equity ratio?
Your firm is considering leasing a magic box. The lease lasts for three years. The lease calls for three payments of $1,350 per year with the first payment occurring at lease inception. The magic box would cost $3,600 to buy and would be straight-lin..
A firm’s milling machine is old, it is still in relatively good working order and would last for another 10 years. It is inefficient compared to modern standards, though, and so the company is considering replacing it.
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