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Post your work would be best. DeYoung Entertainment Enterprise is considering replacing the latex molding machine it uses to fabricate rubber chickens with a newer, more efficient model. The old machine has a book value of $450,000 and a remaining useful life of 5 years, but DeYoung can sell it now to a Halloween mask manufacturer for $135,000. The old machine is being depreciated by $90,000 per year for each year of its remaining life. The new machine has a purchase price of $775,000, an estimated useful life and MACRS class life of 5 years, and an estimated salvage value of $105,000. The applicable depreciation rates are 20.00%, 32.00%, 19.20%, 11.52%, 11.52% and 5.76%. Being highly efficient, it is expected to economize on electric power usage, labor, and repair cost and most importantly, to reduce the number of defective chickens. In total, a annual savings of $185,000 will be realized if the new machine is installed. The company's marginal tax rate is 35% and it has a 12% WACC. a. What is the initial net cash flow if the new machine is purchased and the old one is replaced? b. Calculate the annual depreciation allowances for both machines, and compute the change in the annual depreciation expense if the replacement is made. c. What are the incremental cash flows in Year 1 through Year 5? d. Should the firm purchase the new machine? support your answer. e. In general, how would each of the following factors affect the investment decision, and how should each be treated? 1. The expected life of the existing machine decreases. 2. the WACC is not constant but is increasing as DeYoung adds more projects into its capital budget for the year.
Calculate the times interest earned ratio for next year assuming the firm raises $40 million of new debt at an interest rate of %6 Calculate the times burden covered ratio for next year assuming annual sinking fund payments on the new debt will equa..
A bank offers an investment opportunity, which requires you to invest 10,000 today and the bank promises to return 15,000 in 10 years. What is the embedded interest rate offered by the bank?
Suppose you deposit $2,000 today and your account will accumulate to $4,000 in 10 years. what is the nominal annual rate of interest, given semiannual compounding?
If rates in the market fall between now and one month from now, the mortgage banker:
You are evaluating two different silicon wafer milling machines. The Techron I costs $237,000, has a three-year life, and has pretax operating costs of $62,000 per year If your tax rate is 34 percent and your discount rate is 8 percent, compute the E..
Which of the following is NOT a problem associated with the Capital Asset Pricing Model? Company X has a higher required return than Company Y, but Company X has a lower standard deviation of returns than Company Y. Given this information, wh..
Elroy Rocket is entering his senior year as an accounting major and has a number of options for his summer break. His options for the 3 month break follow: Elroy's incremental profit or loss if he chooses option 2 over option 1 would be?
Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 10 percent, and that the maximum allowable payback and discounted payback statistic for the pr..
Suppose that the standard deviation of returns from a typical share is about 0.55 (or 55%) a year. The correlation between the returns of each pair of shares is about 0.4. Calculate the variance and standard deviation of the returns on a portfolio th..
GIMP Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with 2 years to maturity that is quoted at 105 percent of face value. The issue makes annual payments and has an embedded cost (coupon rate) of 9.8 percent annu..
Suppose your company needs to raise $36 million and you want to issue 25-year bonds for this purpose. Assume the required return on your bond issue will be 7 percent, and you’re evaluating two issue alternatives: A 7 percent semi-annual coupon bond a..
Consider an asset that costs $490,000 and is depreciated straight-line to zero over its seven-year tax life. The asset is to be used in a five-year project; at the end of the project, the asset can be sold for $165,000. If the relevant tax rate is 34..
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