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It's been two months since you took a position as an assistant financial analyst at Caledonia Products. Although your boss has been pleased with your work, he is still a bit hesitant about unleashing you without supervision. Your next assignment involves both the calculation of the cash flows associated with a new investment under consideration and the evaluation of several mutually exclusive projects. Given your lack of tenure at Caledonia, you have been asked not only to provide a recommendation, but also to respond to a number of questions aimed at judging your understanding of the capital-budgeting process. The memorandum you received outlining your assignment follows:We are considering the introduction of a new product. Currently we are in the 34% tax bracket with a 15% discount rate. This project is expected to last five years and then, because this is somewhat of a fad project, it will be terminated. The following information describes the new project:Cost of new plant and equipment:$ 7,900,000 Shipping and installation costs:$ 100,000 Unit sales:Year Units Sold1 70,0002 120,0003 140,0004 80,0005 60,000Sales price per unit: $300/unit in years 1-4 and $260/unit in year 5.Variable cost per unit: $180/unit Annual fixed costs: $200,000 per yearWorking capital requirements: There will be an initial working capital requirement of $100,000 just to get production started. For each year, the total investment in net working capital will be equal to 10% of the dollar value of sales for that year. Thus, the investment in working capital will increase during years 1 through 3, then decrease in year 4. Finally, all working capital is liquidated at the termination of the project at the end of year 5.Depreciation method: Straight-line over 5 years assuming the plant and equipment have no salvage value after 5 years1. Why should Caledonia focus on project free cash flows as opposed to the accounting profits earned by the project when analyzing whether to undertake the project?2. What are the incremental cash flows for the project in years 1 through 5 and how do these cash flows differ from accounting profits or earnings?3. What is the project's initial outlay?4. Sketch out a cash flow diagram for this project.5. What is the project's net present value? (William)6. What is its internal rate of return? (William)7. Should the project be accepted? Why or why not?
Deborah Tan is a listed nurse who earns $3250 per month after taxes. She has been viewing her savings strategies & current banking arrangements to estimate if she should make any changes.
Multiple choice questions on Dividend Policy and Matrix Corporation follows the residual dividend policy. In a year with an exceptionally large capital budget and normal earnings, the firm would most likely
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How should environmental effects be considered when evaluating this, or any other project? How might these affects change your decision in Part b?
Fraser Corporation has announced that its net income for the year ended June 30, 2011, was $1,353,412. The company had EBITDA of $4,606,006, and its depreciation and amortization expense was equal to $1,200,714.
The risk-free rate of return is 10%, the required rate of return on the market is 15%, and High-Flyer stock has a beta coefficient of 1.5. If the dividend per share expected during the coming year, D1, is $2.5 and g=5%, at what price should a shar..
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Explain Capital budgeting involves calculation of IRR, NPV, Payback period and If the required return is greater than the coupon rate
A venture capitalist wants to estimate value of a new venture. The venture is not expected to produce net income or earnings until the end of year five when the net income is estimated at $1,600,000.
Duggins Veterinary Supplies can issue perpetual preferred stock at a price of $50 a share with an annual dividend of $4.50 per share. Ignoring flotation costs, what is the companys cost of preferred stock, rps?
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