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Your company has been approached to bid on a contract to sell 5,100 voice recognition (VR) computer keyboards a year for four years. Due to technological improvements, beyond that time they will be outdated and no sales will be possible. The equipment necessary for the production will cost $4.7 million and will be depreciated on a straight-line basis to a zero salvage value. Production will require an investment in net working capital of $104,000 to be returned at the end of the project and the equipment can be sold for $284,000 at the end of production. Fixed costs are $649,000 per year, and variable costs are $164 per unit. In addition to the contract, you feel your company can sell 10,400, 11,300, 13,400, and 10,700 additional units to companies in other countries over the next four years, respectively, at a price of $355. This price is fixed. The tax rate is 40 percent, and the required return is 10 percent. Additionally, the president of the company will only undertake the project if it has an NPV of $100,000. What bid price should you set for the contract?
Calculate the expected NPV for both projects. - Calculate the variance and standard deviation of the NPVs for both projects. Which project appears to be riskier?
The YTM on a bond is the interest rate you earn on your investment if interest rates don’t change. If you actually sell the bond before it matures, your realized return is known as the holding period yield (HPY). Suppose that today you buy a bond wit..
Suppose your firm is seeking a four year, amortizing $350,000 loan with annual payments and your bank is offering you the choice between a $362,500 loan with a $12,500 compensating balance and a $350,000 loan without a compensating balance. The inter..
Under what condition(s) would a company want to consider calling a callable bond issue?
Consider a four-year project with the following information: initial fixed asset investment = $550,000; straight-line depreciation to zero over the four-year life; zero salvage value; price = $26; variable costs = $18; fixed costs = $190,000; quantit..
An insurance company is offering a new policy to its customers. what is the value of the policy at the child's 65th birthday?
Gunderman Corporation has two divisions: the Alpha Division and the Charlie Division. The Alpha Division has sales of $235,000, variable expenses of $309,800, and traceable fixed expenses of $121,500. The total amount of common fixed expenses not tra..
Financial Statements are critically important in understanding the overall "financial health" of a company. All of the financial statements must be reviewed as a complete package rather than one being analyzed as a standalone statement that could giv..
In December 1995 Boise Cascade’s stock had a beta of 0.95. The Treasury bill rate at the time was 5.8% and the Treasury bond rate was 6.4%. Assume the term structure of interest gives a 200 bp (basis point – a basis point is 1/100 of a %) spread bet..
You are a shareholder in a C corporation. The corporation earns $2.45 per share before taxes. On e is has paid taxes, it will distribute the rest of its earnings to you as a dividend. The corporate tax rate is 38%, and your personal tax rate on (both..
An investor owns a security that is expected to return 14 percent in a booming economy and 6 percent in a normal economy. The overall expected return on the security is 8.88 percent. Given there are only two states of the economy, what is the probabi..
Which of the following would tend to reduce the weighted average cost of capital for a firm? Margo Lawrence is employed full-time as a paralegal, but on evenings and weekends, she bakes wedding cakes.
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