Reference no: EM133110333

Question 1 - A manufacturing plant is deciding whether to purchase a new machine for a cost of $2 million. The cash flows that the machine will bring in are $570,000 in the first year, $600,000 in the second year, and $500,000 in the third year (and no further cash flows). Assume that the discount rate is 18%.

a) Calculate the net present value of this project (machine purchase). Write out your equation(s) clearly and show your input(s).

b) State whether the firm should buy this machine based on the NPV rule and briefly explain why.

Question 2 - Your research shows that Machines Inc. has 125,000 in short-term investments, and 22,000 shares outstanding. Further, the company has $225,000 in debt and $75,000 in preferred stock. Further, you determined the value of operations to be $500,000.

a) Determine the total estimated intrinsic value. Write out your equation(s) clearly and show your input(s).

b) Determine the estimated intrinsic value of equity. Write out your equation(s) clearly and show your input(s).

c) Determine the estimated intrinsic stock price. Write out your equation(s) clearly and show your input(s).