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Week 5

Week 5

1. Compute the MIRR statistic for Project J if the appropriate cost of capital is 9 percent. ( Do not round intermediate calculations and round your final answer to 2 decimal places.)

Project J

Time                    0                 1                2                   3                   4                      5

Cash flow       -$1000           $380          $1530           $530             $330              $-110

MIRR

Should the project be accepted or rejected?

2. Problem 12-3 EAC Approach

You are trying to pick the least- expensive car for your new delivery service. You have two choices: the Scion xA, which will cost $14,500 to purchase and which will have OCF of -$1,300 annually throughout the vehicle’s expected life of three years as a delivery vehicle; and the Toyota Prius, which will cost $20,500 to purchase and which will have OCF of -700 annually throughout that vehicle’s expected 4-year life. Both cars will be worthless at the end of their life. You intend to replace whichever type of car you choose with the same thing when it’s life runs out, again and again out into the foreseeable future.

If the business has a cost of capital of 11 percent, calculate the EAC ( Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places.)

Scion’s EAC

Toyota’s EAC

Which one should you choose?

Scion xA

Toyota Prius

3. Problem 11-8 Cost of Preferred Stock

Marme, Inc. has preferred stock selling for 97 percent of par that pays an annual coupon of 10 percent.

What would be Marme’s component cost of preferred stack? ( Round your answer to 2 decimal places.)

Cost of preferred stock________________________

4. Suppose you sell a fixed asset for $113,000 when its book value is $133,000. If your company’s marginal tax rate is 35 percent, what will be the effect on cash flows of this sale ( ie., what will be after tax cash flow of this sale.)

(Enter your answer as a whole number.)  ATCF ____________________

5. Compute the IRR static for Project E. The appropriate cost of capital is 7 percent. ( Do not round intermediate calculations and round your final answer to 2 decimal places.)

Project E

Time                 0               1                  2                      3                       4                        5

Cash flow    -$2000       $750            $700               $720                  $500                  $300

IRR

Should the project be accepted or rejected?

6. You are considering the purchase of one of two machines used in your manufacturing plant. Machine A has a life of two years, costs $105 initially, and then $150 per year in maintenance costs. Machine B costs $175 initially, has a life of three years, and requires $125 in annual maintenance costs, Either machine must be replaced at the end of its life with and equivalent machine.

The discount rate is 13 percent and the tax rate is zero. Calculate the EAC. ( Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places.)

The discount rate is 13 percent and the tax rate is zero. Calculate the EAC. (Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places.)

EAC

Machine A       __________________

Machine B       __________________

Which one should you choose

Machine A

Machine B

7. Suppose that LilyMac, Photography expects EBIT to be approximately $43,000 per year for the foreseeable future, and that it has 500 10yea, 5 percent annual coupon bonds outstanding. ( Use table 11.1)

What would the appropriate tax rate be for use in the calculation of the debt component of LilyMac’s WAC?

Tax rate

8. FarCry Industries, a maker of telecommunications equipment, has 3 million shares of common stock outstanding, 1 million shares of preferred stock outstanding, and 10,000 bonds. Suppose the common shares are selling for $26 per share, the preferred shares are selling for $14.00 per share, and the bonds are selling for 97 percent of par.

What would be the weight used for equity in the compution of FarCry’s WAC. ( Round your answer to 2 decimal places.)

Weight used ________________

9. Calculate the EAC

ALL ANSWERS MUST BE ENTERED AS A FORMULA

You are considering the purchase of one of two machines used in your manufacturing plant. Machine A has alife of two years, costs $95 initially, and then $140 per year in maintenance costs. Machine B costs $165 initially, has a life of three years, and requires $115 in annual maintenance costs. Either machine must be replaced at the end of it’s life with an equivalent machine.

The discount rate is 12 percent and the tax rate is zero. Calculate the EAC. ( Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places,)

Which one should you choose?

Machine A life ( Years)                                    2

Machine A Initial cost                                   $ 95.00

Machine A maintenance cost                       $ 140.00

Machine B life (Years)                                     3

Machine B initial cost                                    $ 165.00

Machine B maintenance cost                        $ 115.00

Discount rate                                                  12.00%

Tax rate                                                           0.00%

Complete the following analysis. Do not hard code value in your calculations, and do not round intermediate calculations.

Machine A                                              Machine B

Year   0

1

2

3

4

5

6

7

8

9

10

EACa _________________

EACb _________________

Choice ________________

10. Compute the NPV for Project K if the appropriate cost of capital is 6 percent. ( Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your final answer to 2 decimal places.) Should the project be accepted or rejected?

Cost of Capital                                               6%

Time                                                             Cash Flow

0                                                                     $ – 11,800

1                                                                     $ 5,900

2                                                                     $ 6,900

3                                                                     $ 6,900

4                                                                     $ 5,900

5                                                                     $ – 14,8000

Complete the following analysis. Do not hard code values in your calculations and do not round intermediate calculations.

NPV ____________________

Accept or reject decision


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