Reference no: EM133615923
Problem I. We are evaluating a project that costs $842,594, has an eight-year life, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at 56,053 units per year. Price per unit is $44, variable cost per unit is $16, and fixed costs are $425 per year. The tax rate is 35%, and we require a return of 17% on this project. Calculate the Accounting Break-Even Point.
Problem II. We are evaluating a project that costs $840,990, has an eight-year life, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at 55,531 units per year. Price per unit is $43, variable cost per unit is $15, and fixed costs are $415,842 per year. The tax rate is 35%, and we require a return of 22% on this project. In dollar terms, what is the sensitivity of NPV to changes in the units sold projection? The sensitivity is just the first order condition in the calculus. For example, in our question, the sensitivity of NPV changes associate change in the units sold as an example. The sensitivity means the NPV changes associate 1% change in units sold. Thus, the change starting points and ending points will not affect the question.
Problem III. Your company is deciding whether to invest in a new machine. The new machine will increase cash flow by $352,000 per year. You believe the technology used in the machine has a 10-year life; in other words, no matter when you purchase the machine, it will be obsolete 10 years from today. The machine is currently priced at $1,760,000. The cost of the machine will decline by $110,000 per year until it reaches $1,320,000, where it will remain. The required return is 15%. What is the NPV if the company decides to wait 2 years to purchases the machine?
Problem IV. Maverick Manufacturing has a target debt-equity ratio of 0.54. Its cost of equity is 13 %, and its cost of debt is 7 %. If the tax rate is 39 %, what is Maverick's WACC?
Problem V. Gold Alliance Company needs to raise $50 million to start a new project and will raise the money by selling new bonds. The company will generate no internal equity for the foreseeable future. The company has a target capital structure of 65% common stock, 5% preferred stock, and 30% debt. Flotation costs for issuing new common stock are 8%, for new preferred stock, 6 %, and for new debt, 2%. What is the initial cost figure Gold should use when evaluating its project?
Problem VI. Biscuits Inc. has offered $414 million cash for all of the common stock in Gravy Corporation. Based on recent market information, Gravy is worth $387 million as an independent operation. If the merger makes economic sense for Biscuits, what is the minimum estimated value of the synergistic benefits from the merger?