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Pierre Imports is evaluating the proposed acquisition of new equipment at a cost of $900,000. In addition the equipment would require modifications at a cost of $50,000 plus shipping costs of $10,000. The equipment falls into the MACRS 3-year class, and will be sold after 3 years for $100,000. The equipment would require increased net working capital of 60,000. The equipment is expected to save the company $70,000 per year in before-tax operating costs. The company's marginal tax rate is 35 % and its cost of capital is 11%.
a. What is the cash outflow at Time 0?
b. Calculate net operating cash flows in years 1, 2, and 3?
c. Calculate the non-operating terminal year cash flow.
d. Calculate net present value. Should the machine be purchased?
If the firm could reduce the average age of its inventory from 73 days, to 63 day, by how much would it reduce its dollar investment in working capital?
Starting today, George is going to contribute $300 on the first of each month to his retirement account. His employer will contribute an additional 50% of the amount George contributes. If both George and his employer continue to do this and he can e..
If an investor is long May Wheat and it is initially trading at 4.25 and short the September Wheat contract which is trading at 4.75. One month later the May Corn contract is closed at 4.50 and Sept Corn closed at 4.25, the gain or loss per contract ..
Describe your opinion on this topic. Do you feel less pain when using a credit card? Are your spending decisions made more carefully when you use cash as opposed to credit cards?
For a portfolio of 40 randomly selected stocks, which of the following is most likely to be true? The beta of the portfolio is equal to the average of the betas of the individual stocks
A city has learned that by buying larger garbage trucks, it could reduce labor costs for garbage removal. Note: All the dollar amounts below are in this year's dollars (constant dollars). Cost of trucks today is $400,000. Assuming the costs and benef..
If firm A's default probability is 10%, firm B's default probability is 20%, and the joint default probability between the two firms is 3%, solve for the default correlation between firms A and B.
Rank the following bonds in order from lowest credit risk to highest risk all with the same time to maturity, by their yield to maturity: (Rank: 1= lowest, 4 = highest)
A manager has to decide to sell an old machine or keep it with a major overhaul. Keeping the machine requires a major overhaul cost of $400,000 at time zero. The overhaul cost is depreciable from time 0 to year 5 (over six years) based on MACRS 5-yea..
Suppose your company imports computer motherboards from Singapore. The exchange rate is currently 1.2875 S$/US$. You have just placed an order for 27,000 motherboards at a cost to you of 237.50 Singapore dollars each. You will pay for the shipment wh..
The current spot exchange rate is $1.55 = €1.00 and the three-month forward rate is $1.60 = €1.00. Consider a three-month American call option on €62,500 with a strike price of $1.50 = €1.00. If you pay an option premium of $5,000 to buy this call, a..
When the firm uses debentures rather than first mortgage bonds, What effect does this have on the interest rate that a firm must pay on a new issue of long-term debt. Why does it have such an effect?
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