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A company wants to purchase new equipment to replace some old, existing equipment. The old equipment is fully depreciated and has a current market value of $1.2M. The new equipment costs $10.4M and will be depreciated for 5 years. The equipment produces items with constant annual revenues of $20M. Current costs (using the old equipment) are $3M per year. The new equipment will not change the expected revenues (they will remain at $20M per year), but will allow the company to cut costs by $1M per year. The project is expected to last for 4 years, at which time the new equipment would be worth $6.0M. If the old equipment is kept, it will be worthless in 4 years. The company's marginal tax rate is 35%. The company is financed with $50M of preferred stock and $150M of common stock. The preferred stock has a current value of $20 and pays constant dividends of $2 annually. The expected return on the common stock is 14.4%. Should the project be accepted?Describe and provide an approximate value of the initial cash flow. Describe and provide an approximate value of the annual cash flow. Provide an estimation of the life of the project, as well as the exit costs.Then, calculate the NPV and IRR of the project.
Antiques R Us is a mature manufacturing firm. The company just paid a dividend of $11.65, but management expects to reduce the payout by 4 percent per year indefinitely. If you require a return of 12 percent on this stock, what will you pay for a sha..
A project requires an initial cash outlay of $95,000 and has expected cash inflows of $20,000 annually for 9 years. The cost of capital is 10%. What is the project’s IRR?
Which of the following bonds as the greatest price change for a given change in interest rates?
You are serving on a jury. A plaintiff is suing the city for injuries sustained after a freak street sweeper accident. In the trial, doctors testified that it will be five years before the plaintiff is able to return to work. The jury has already dec..
What is the current account balance of a nation with a government budget deficit of $128 billion, private saving of $806 billion, and domestic capital formation of $777 billion?
The stock of Uptown Men's Wear is expected to produce the following returns given the various states of the economy. What is the expected return on this stock? Probabilities: Recession:0.4 Normal:0.4 Boom:0.2 Returns: Recession:-11% Normal:12% Boom:2..
Dunkin' Donuts joined many other service providers by centralizing manufacturing. Doughnut making in a geographic area is now done centrally for many stores, and the doughnuts are trucked to stores in the early morning. Imagine the decision of the fr..
Why do higher marketing variable costs not increase total variable costs on the income statement? Select One Save Answer A. Marketing costs are considered period costs on the income statement
Company A is trying to determine whether to replace an existing asset. The proposed asset has a purchase price of $50,000 and has installation costs of $3,000. The asset will be depreciated over its five year life using the simplified straight-line m..
Maloney, Inc., has an odd dividend policy. The company has just paid a dividend of $4 per share and has announced that it will increase the dividend by $6 per share for each of the next five years, and then never pay another dividend. If you require ..
Your firm needs a machine which costs $230,000, and requires $44,000 in maintenance for each year of its 10 year life. After 5 years, this machine will be replaced. The machine falls into the MACRS 10-year class life category. Assume a tax rate of 40..
A financial manager estimates the Present Value of the cash flows produced by a machine to be $55,000. Which of the following is the most accurate statement that could be inferred from this estimate?
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