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Southwest Airlines is considering the purchase of a new baggage-handling machine that moves bags quicker and with less damage. The cost is $160,000. The machine will be depreciated using the straight line method over its seven year life. If the machine is purchased, SWA will save $31,000 per year in damaged bags costs during the first five years. Because of higher maintenance costs during the last two years the savings will only be $28,000. the firm is in a34% tax bracket. Given that the firm’s required rate of return is 13%, compute the NPV and IRR of the investment. Should they make the investment?
KADS, Inc., has spent $460,000 on research to develop a new computer game. The firm is planning to spend $260,000 on a machine to produce the new game. Shipping and installation costs of the machine will be capitalized and depreciated; What will the ..
What is the present value of the relevant (net) costs of buying 100 shares of stock? Which is the least expensive way to acquire your stock?
On January 1, 2012, your brother's business obtained a 30-year amortized mortgage loan for $250,000 at a nominal annual rate of 4.35%, with 360 end-of-month payments. The firm can deduct the interest paid for tax purposes. What will the interest dedu..
What is your company’s weighted average flotation cost, assuming all equity is raised externally?
Suppose you have been hired as a financial consultant to Defense Electronics, Inc. publicly traded firm that is market share leader in radar detection systems.
Consider a call option on a stock selling for $30 per share with a $32 exercise price. The stock's standard deviation is 36% per year; the option matures in 6 months; and the risk-free interest rate is 4% per year. Find the risk neutral probability a..
Zhdanov Inc. forecasts that its free cash flow in the coming year, i.e., at t = 1, will be -$10 million, but its FCF at t = 2 will be $20 million. After Year 2, FCF is expected to grow at a constant rate of 4% forever. If the weighted average cost of..
What is the key assumption in the model to generate liquidity effect?
For each capital structure under consideration, calculate the levered beta, the cost of equity, and the WACC.
Differentiate between sunk costs and opportunity costs. Which of these costs should be included in incremental cash flows and which should be excluded?
The current set of spot interest rates with one, two, three and four years to maturity are 4%, 6%, 7% and 7.5% respectively.
Assume that the overall cost of debt is the weighted average of that implied by the two outstanding debt issues. Both bonds make semiannual payments.
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