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You have been asked by the president of your firm to evaluate the proposed acquisition of new special-purpose equipment. The equipment's base price is $500,000, and another $50,000 for its installation costs. The equipment falls into the MACRS 3-year class, and it will be sold at the end of the project’s 2-year life for $250,000. Use of the equipment will require net working capital investment equivalent to 20% of the following year’s incremental revenues. The equipment will increase annual revenues by $100,000, and save the firm $200,000 in annual operating costs. The annual revenues and operating costs are expected to grow at an annual rate of 10% during the 2nd-year of the project. This equipment will be placed in an unoccupied site, which can otherwise be sold for $100,000 today. This site will be sold for the same price at the termination of the project. The depreciation of this site that your firm owns can be ignored. The firm's tax rate is 30 percent and the discount rate for the project is 12%.
(a) Compute the non-operating cash flows (i.e., capital spending and change in NWC) at the end of Year 2. <$333,679>
(b) What is the NPV <$73,430>
The risk-free rate of interest is 3% and the market risk premium is 5%. Alpha Company’s hardware division has an asset beta of 1.4, a free cash flow of $450 million, and an expected growth rate of 4.0%. The value of the hardware division (in $million..
(Effective interest Rate) A store will give you a 3% discount on the cost of your purchase if you pay cash today. Otherwise, you will be billed the full price with payment due in 1 month. what is the implicit borrowing rate being paid by customers wh..
You are analyzing the after-tax cost of debt for a firm. You know that the firm’s 12-year maturity, 9.10 percent semi-annual coupon bonds are selling at a price of $767.17. These bonds are the only debt outstanding for the firm. What is the after-tax..
What effect does the terminal value have on Net Present Value and Internal Rate of Return? Would omitting or changing the terminal value change your decision?
A U.S. Treasury bill with 89 days to maturity is quoted at a discount yield of 4.17 percent. What is the bond equivalent yield?
Which one of the following will increase the value of a firm's net working capital?
Two very popular strategies when holding a stock are: 1) Covered Call and 2) Protective Put. Looking at the payoff of these strategies. What is the benefit and cost of the protective put if you start holding a stock? What is the benefit and cost of t..
The market price is $900 for a 10-year bond that pays 8% interest semi annually. What is the bond's expected rate of return? If the required rate of return is 11%, is this bond overpriced, fairly priced, or underpriced? (Please show your calculation)
Beaverton Corporation has debt/assets ratio of .25, its cost of debt is 7% and that of equity 12%. The tax rate of Beaverton is 30%. The company is not growing and it has a dividend payout ratio of 100%. Its dividend per share is $2.5. Beaverton has ..
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 12 percent, and that the maximum allowable payback and discounted payback statistics for your ..
Nichols Corporation's value of operations is equal to $400 million after a recapitalization (the firm had no debt before the recap). It raised $300 million in new debt and used this to buy back stock. Nichols had no short-term investments before or a..
Ralph bought a share of stock for? $31.50 that paid a dividend of? $.85 and sold six months later for? $27.65. What was his dollar profit or loss and holding period ?return?
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