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The Rodriquez Company is considering an average risk investment in a mineral water spring project that has a cost of 150,000. The project will produce 1,000 cases of mineral water per year indefinitely, the current sales price is $138 per case and the current cost per case all variable is $105. The firm is taxed at a rate of 34 percent. Both prices and costs are expected to rise at a rate of 6 percent per year. The firm uses only equity and it has a cost of capital of 15 percent. Assume that cash flow consist only of after tax profits, since the spring has an indefinite life and will not be depreciated?
a. should the firm accept the project? Hint the project is perpetuity so you must use the formula for perpetuity to find its npv.
b. if total costs consisted of a fixed cost of 10,000 per year and variable costs of 95 per unit and if only the variable cost were expected to increase with inflation would this make the project better or worse? Continue with the assumption that the sales price will rise with inflation
The price of a non-dividend paying stock is $19.24 and the price of a 3-month European put option on the stock with a strike price of $20 is $4.22. The risk-free rate is 5% per annum. What is the price of a 3-month European call option with a strike ..
Which of the following is not discussed in the text as a method for analyzing risk in capital budgeting?
Big Sky Mining Company must install 1.5 million of new machinery it its Nevada mine. It can obtain a bank loan for 100% of the purchase price, or it can lease the machinery. Assume that the following facts apply: (1)The machinery falls into the MACRS..
Two primary contractual hedges are forward contracts and options. Please define and explain each of the above hedges. (B) Assume the following: LC Exposure = 10,000; Spot Rate = $1.00/LC1.00; 1 Year Forward = $0.98/LC1.00; 1 Year Strike Price = $0.97..
You would like to have $44,073 for the down payment on a house you plan to buy five years after you graduate. If your investments earn 1.2% APR compounded monthly, how much do you have to invest each month, starting next month, to meet your investmen..
By definition, a firm's operating breakeven point represents the level of production and sales at which....
Your cousin wants to buy a car but he really can’t afford it. He needs a loan of $22,000. The finance manager at the dealership offers him something like a loan in which your cousin will get the $22,000 and will pay $413 per month for the next 60 mon..
Zipcar is a highly successful new company specializing in a brand-new model for automobile rental services, allowing their customers long-term and flexible access to shared vehicles on a daily or hourly basis. Zipcar's innovative model allows those w..
A firm had a ledger balance of $4,122 with no outstanding deposits or checks. Today, your firm deposited 4 checks in the amount of $466 each and wrote a check in the amount of $969. What is the amount of the collection float as of the end of the day?
Suppose the following bond quotes for IOU Corporation appear in the financial page of today’s newspaper. Assume the bond has a face value of $2,000 and the current date is April 19, 2015. What is the yield to maturity of the bond? What is the current..
Thornley Machines is considering a 3-year project with an initial cost of $1,020,000. The project will not directly produce any sales but will reduce operating costs by $640,000 a year. The equipment is depreciated straight-line to a zero book value ..
based on your reading of the book what money cant buy the moral limits of the markets by michael j. sandel write an
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