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The CEO for Fincher Mfg., a producer of building materials located near Atoka, Oklahoma, is evaluating a proposal to produce asphalt shingles at the firm’s idle manufacturing facility on the North side of Atoka. Although the vacant facility could be sold for $2,500,000, it is carried on Fincher's books at historical cost of $5,000,000. The equipment required for the production of asphalt shingles, including Surfacing Sections, an Accumulator, a Granule Mixing System with proportional valve control, and Shingle Cutters will cost $63 million and can be expected to have a useful life of 10 years. The Internal Revenue Service allows machinery used in producing construction materials to be depreciated to a zero salvage value over 7 years using straight-line depreciation. Sales are expected to be $50,000,000 per year during each of the next 10 years. The variable costs of production are expected to be 70 percent of sales. Although the project will not require an investment in accounts receivable, the chief financial officer estimates that the firm will need to maintain an inventory of finished shingles. The industry standard for inventory turnover on the manufacturing side of the construction industry is 7 times per year. The firm has an opportunity cost of capital of 10 percent and a corporate tax rate of 40 percent. Assuming that at the end of 10 years further investment in producing asphalt shingles will be unprofitable and that the salvage value of the manufacturing facility and equipment will be zero, determine whether Fincher should undertake the investment in shingle production.
An investment project provides cash inflows of $875 per year for eight years. (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16). Enter "0" if the payback period is never.) What is the project payback period..
What is operating leverage? How if at all, is it similar to financial leverage? If a firm has high operating leverage, would you expect it ot have high or low financial leverage? explain your reasoning?
Scanlin, Inc., is considering a project that will result in initial aftertax cash savings of $1.86 million at the end of the first year, and these savings will grow at a rate of 2 percent per year indefinitely. The firm has a target debt–equity ratio..
Deployment Specialists pays a current (annual) dividend of $1 and is expected to grow at 20% for two years and then at 4% thereafter. If the required return for Deployment Specialists is 8.5%, what is the intrinsic value of Deployment Specialists sto..
Using a 5% discount rate, calculate the Net Present Value, Payback, Profitability Index, and IRR for each of the investment projects below (note, the inflows are for each year). Assuming a budget of $2,000,000 what are your recommendations for the ab..
Great Lakes Clinic has been asked to provide exclusive healthcare services for next year's World Exposition. The clinic manager’s wanted to conduct a financial analysis of the project. An up-fron cost of $160,000 is needed to get the clinic in operat..
A project has an initial cost of $35,000 and a four-year life. The company uses straight-line depreciation to a book value of zero over the life of the project. The projected net income from the project is $1,100, $1,300, $1,600, and $1,800 a year fo..
Upton Computers makes bulk purchases of small computers, stocks them in conveniently located warehouses, ships them to its chain of retail stores, and has a staff to advise customers and help them set up their new computers. What is the amount of the..
Raylan Givens borrows $150,000 to buy a house. The adjustable rate mortgage carries a 1.5 percent rate for the first 3 years. After that the rate will change annually to reflect market conditions. The annual cap is 2% (i.e., the largest increase in a..
The Allegheny Valley Power Company common stock has a beta of 0.80. If the current risk-free rate is 6.5% and the expected return on the stock market as a whole is 16%, determine the cost of equity capital for the firm (using the CAPM).
A five-year project has an initial fixed asset investment of $350,000, an initial NWC investment of $38,000, and an annual OCF of −$37,000. The fixed asset is fully depreciated over the life of the project and has no salvage value. If the required re..
If the spot rate of the euro in one year is $1.00, what is Beth's percentage return from her strategy? If the spot rate of the euro in one year is $1.08, what is Beth's percentage return from her strategy?
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