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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 this machine properly, workers would have to go through a brief training session that would cost $5,000 after tax. In addition, it would cost $5,000 after tax to install this machine properly. Also, because this machine is extremely efficient, its purchase would necessitate an increase in inventory of $20,000. This machine has an expected life of 10 years, after which it will 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 banks, resulting in additional interest payments of $8,000 per year. Assume simplified straight-line depreciation and that this machine is being depreciated down to zero, a 34 percent marginal tax, 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? (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 termination of the project)? (d) Should the machine be purchased?
If a net present value analysis for a normal project gives an NPV greater than zero, an internal rate of return calculation on the same project would yield an internal rate of return ________________ the required rate of return for the firm. When a p..
An oil company is drilling a series of new wells that are adjacent to an existing oil field. About 20% of the new wells will be dry holes and will produce zero oil. If the wells do, in fact, strike oil, they have different expected values. What is th..
Expected Return Circuit City Stores (CC) recently paid a $.25 dividend. The dividend is expected to grow at a 23.90 percent rate. At the current stock price of $8.86, what is the return shareholders are expecting?
Eastern Clothing Company is considering manufacturing a new style of shirt, whose data are shown below. The equipment to be used would be depreciated by the straight-line method over its 3-year life and would have a zero salvage value, and no new wor..
What can a financial institution often do for a surplus economic unit that it would have difficulty doing for itself if the surplus economic unit (SEU) were to deal directly with a deficit economic unit (DEU)?
We are evaluating a project that costs $1,180,000, has a five-year life, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at 88,100 units per year. Suppose the projections g..
A five-year project has an initial fixed asset investment of $305,000, an initial NWC investment of $29,000, and an annual OCF of $28,000. The fixed asset is fully depreciated over the life of the project and has no salvage value. If the required ret..
The D.J. Masson Corporation needs to raise $400,000 for 1 year to supply working capital to a new store. Masson buys from its suppliers on terms of 1/10, net 90, and it currently pays on the 10th day and takes discounts. What is the effective annual ..
Complete the balance sheet and sales information using the following financial data: totals assets turnover: 1.5x days sales outstanding: 41 days inventory turnover ratio: 7x fixed asset turnover:3.5x current ratio:1.7x gross profit margin on sales=2..
An unlevered firm has a value of $900 million. An otherwise identical but levered firm has $50 million in debt at a 5% interest rate. Its cost of debt is 5% and its unlevered cost of equity is 12%. After Year 1, free cash flows and tax savings are ex..
The nominal anchor _____. The Federal Reserve System was set up with 12 regional Federal Reserve banks because ___. A prevalant feature of debt contracts for both households and businesses is ___.
On the evening’s financial news broadcast, the reporter states Last prices fell by 0.5%. This is an annual rate of deflation of #%&@* percent. Find the garbled number.
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