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A large automobile manufacturing company is considering the installation of a high-tech handling system. The initial cost of the system is $3,000,000 and it is estimated it will save $750,000 per year in manual labor, and will incur $27,500 in operating expense the first year increasing by $100 per year for every year thereafter. The salvage value at the end of the system’s 10 year life will equal the cost of removal. The company’s MARR is 12%. a. Show your cash flow diagram from the company’s perspective. b. Calculate either the PW, AW, or FW for this project. Based on your calculation, should this project be recommended for investment? State your reason for either accepting or rejecting this project. c. Use Excel to determine this project’s IRR. Based on your value for IRR, should the project be accepted or rejected? Why or why not. d. If this project was externally funded and the external financing rate, ?, was 15%, use the external rate of return methodology to solve for ERR. Based on your findings, would you still recommend this project for funding? Provide detail that supports your recommendation. e. To help finance this project, the company marketed a $3,000,000 ten-year bond paying 10% APR paid semi-annually. You have personally researched this company and feel confident this company will have the cash available to pay its debt of $3,000,000 when the bond becomes due and you also feel confident that the company has the liquidity (available cash) to pay its semi-annual interest payments to its bond holder as they become due over the life of the bond. Five years has passed and you notice this bond is available for sale. You plan to purchase this bond and hold it until it matures in 5 years. How much should you pay for this bond if you require an 8% return?
You purchase a $325,000 Town home and you pay 25% down. You obtain a 30 year fixed-rate mortgage with an annual interest rate of 5.75%. After 5 years you refinance the mortgage for 25 years at a 5.1% annual interest rate. A.T. bond with a $1000 par i..
Currency Call Options: - Determine the probability distribution of net gains per unit from purchasing a call option on British pounds.-
For the mixed stream of cash flows shown in the table below, determine the future value at the end of the final year if deposits are made into an account paying annual interest of 12%, assuming that no withdrawls are made during the period and that t..
A company has issues one- and two- year bonds providing 8% coupons, payable annually. The yields on the bonds (expressed with continuous compounding) are 6% and 6.6%, respectively. Risk-free rats are 4.5% for all maturities. The recovery rate is 35%...
You are interested in buying a stock that has a price of $72. You have projected that next year there is: a 10% probability the stock will equal $1, a 20% probability the stock will equal $44, a 30% probability the stock will equal $83, a 30% probabi..
Reasons to invest in marketable securities would not include:
Assume that the risk-free rate is 5% and the market risk premium is 6%. What is the expected return for the overall stock market? What is the required rate of return on a stock with a beta of 1.2?
When the internal rate of return is greater than the required return, the net present value is positive. If the IRR exceeds the required return, the profitability index will be more than 1.0. The payback period considers the amount but not the timing..
On excel a relationship to get Average annual income during retirement--stated in inflation-adjusted dollars: My Average annual income during retirement--stated in today's dollars is 80,000, Average annual inflation rate during your career 3.20%, and..
Given that risk-averse investors demand more return for taking on more risk when they invest, how much more return is appropriate for, say, a share of common stock, than is appropriate for a Treasury bill?
Which stock would you consider to be riskier? Why?- If you knew that the beta coefficient of Cornhusker stock is 1.5 and the beta of Mustang is 0.9, how would your answer to Part a change?
If the present value of an ordinary, 10 year annuity is $20,000 and interest rates are 5%, what is the present value of an annuity due with the same length of life, present values and interest rate? Present Value:
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