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To solve the bid price problem presented in the text, we set the project NPV equal to zero and found the required price using the definition of OCF. Thus the bid price represents a financial break-even level for the project. This type of analysis can be extended to many other types of problems. Romo Enterprises needs someone to supply it with 115,000 cartons of machine screws per year to support its manufacturing needs over the next five years, and you’ve decided to bid on the contract. It will cost you $820,000 to install the equipment necessary to start production; you’ll depreciate this cost straight-line to zero over the project’s life. You estimate that, in five years, this equipment can be salvaged for $65,000. Your fixed production costs will be $320,000 per year, and your variable production costs should be $9.80 per carton. You also need an initial investment in net working capital of $70,000. Assume your tax rate is 35 percent and you require a 12 percent return on your investment. a. Assuming that the price per carton is $16.50, what is the NPV of this project? b. Assuming that the price per carton is $16.50, find the quantity of cartons per year you need to supply to break even. c. Assuming that the price per carton is $16.50, find the highest level of fixed costs you could afford each year and still break even.
What is the present value of $4,000 received at the end of each year for five years if you can earn an 9% rate of return on your investments?
What annual rate would Bank B need to use in order to give the same future value as Bank A?
Donna Karan produces swimming trunks. The average selling price of one of the company's trunks is $40.18. The variable cost per unit is $18.84, and Donna Karan has average fixed costs per year of $38198. What is the break-even point in dollar sales?
Tunney Industries can issue perpetual preferred stock at a price of $55.00 a share. The stock would pay a constant annual dividend of $4.50 a share. What is the company's cost of preferred stock, rp? Round your answer to two decimal places.
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)?
Muscle Motors has a new sports car called the SmoMobile® that it is evaluating before bringing to market.
interest rate per year is 3%. On February 14, call options on Royal Dutch Shell expiring on July 1 sold for $4.60, while put options with same exercise price
Bosio Inc.'s perpetual preferred stock sells for $97.50 per share, and it pays an $8.50 annual dividend. If the company were to sell a new preferred issue, it would incur a flotation cost of 4.00% of the price paid by investors. What is the company's..
Elise, however, hasn’t yet done the painting, and the original issuer refuses to pay John. Discuss the rights of the parties.
Assume that the CAPM holds and stock A has beta of 0.5 with E(r) is 10%. what must be the risk free rate?
Caan Corporation will pay a $3.56 per share dividend next year. The company pledges to increase its dividend by3.75 percent per year indefinitely. If you require a return of 11 percent on your investment, how much will you pay for the company's stock..
Thirsty Cactus Corp. just paid a dividend of $1.55 per share. The dividends are expected to grow at 35 percent for the next 7 years and then level off to a 6 percent growth rate indefinitely. If the required return is 13 percent, what is the price of..
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