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Part 1 Garcia's Truckin Inc. is considering the purchase of a new production machine for $200,000. The purchase of this machine will result in an increase in earnings before interest and taxes of $50,000 per year. To operate the machine properly, workers would have to go through a brief training session that would cost $5,000 after taxes. It would cost $5,000 to install the machine properly. Also, because this machine is extremely efficient, it's purchase would necessitate an increase in inventory of $20,000. This machine has an expected life of 10 years, after which it would have no salvage value. Finally, to purchase the new machine, it appears that the firm would have to borrow $100,000 at 8 percent interest from its local bank, resulting in additional interest payments of $8,000 per year. Assume simplified straight-line depreciation and that the machine is being depreciated down to zero, a 34 percent marginal tax rate and a required rate of return of 10 percent. a) What is the initial outlay associated with this project? b) What are the annual after-tax cash flows associated with this project for years 1 through 9?(cash flow from 1 to 9 are equal) c) What is the terminal cash flow in year 10? (What is the annual after-tax cash flow in year 10 plus any additional cash flows associated with the termination of the project)? Should the machine be purchased? Part 2 Mutually exclusive projects. Nanotech currently has a production electronics facility and it is cost prohibitive to expand this production facility. Nanotech is deciding between the following four contracts. Which one should they accept? A $120 million at 100% production use B $110 million at 90% production use C $60 million at 60% production use D $50 million at 40% production use A? B? B and D? C and D? B and C? Part 3 Calculating free cash flows. Racin Scooters is introducing a new product. The expected change in EBIT is $475,000. They have a 34 percent marginal tax rate. There will be $100,000 of depreciation per year. And the following changes: Accounts receivable $45,000/no project $63,000/with project Inventory $65,000/no project $80,000/with project Accounts payable $70,000/no project $94,000/with project What is the project's free cash flow in year 1?
A firm offers terms of 2.4/7, net 60. a. What effective annual interest rate does the firm earn when a customer does not take the discount? (Use 365 days a year. Do not round intermediate calculations. Enter your answer as a percent rounded to 2 deci..
Assume that the consolidated balance sheet for the commercial banking system can be simplified as follows: D+NW=R+L where D=deposits, NW= net worth, R=reserves and L=loans. what is the value of the money multiplier?how is the money multiplier related..
Primrose Corp has $19 million of sales, $3 million of inventories, $2 million of receivables, and $3 million of payables. Its cost of goods sold is 70% of sales, and it finances working capital with bank loans at an 7% rate. By how much would pre-tax..
The Blue Bird Company plans a $79 million expansion. The expansion is to be financed by selling $50 million in new debt and $29 million in new common stock. The before tax required rate of return on debt is 5% and the required rate of return on equit..
A prestigious investment bank designed a new security that pays a quarterly dividend of $5.00 in perpetuity. The first dividend occurs one quarter from today.
Suppose you buy both a European put and call options on the same security with both options is expiring in 6 months and both having strike price equal to the initial value of the security. Under what condition this is a reasonable investment?
Familiarise yourself with the Anthonys Orchard company and its current situation; this can be done by exploring each of the tabs across the top of the screen in the Anthony's Orchard case study media.
A 10-year U.S. Treasury bond with a face value of $10,000 pays a coupon of 5.50% (2.750% of face value every six months). The semi annually compounded interest rate is 4.6% (a six-month discount rate of 4.6/2 = 2.3%). What is the present value of the..
What factors affect a firm's degree of transaction exposure in a particular currency? For each factor, explain the desirable characteristics that would reduce transaction exposure.
The beta of M Simon Inc., stock is 1.7, whereas the risk-free rate of return is 0.08. If the expected return on the market is 0.14, then what is the expected return on M Simon Inc?
Changes in sales cause changes in profits. Would the profit change associated with sales changes be larger or smaller if a firm increased its operating leverage? Explain your answer.
A firm with a 40% marginal tax rate pays $1000 in interest on bonds that have a 6% yield-to-maturity. Assuming the bonds will never be paid-off, the market value of the tax savings is: Accepting the first proposition means there is not an agency prob..
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