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A firm is thinking about replacing a machine. The machine was purchased four years ago for $12,000 and is being depreciated using the 5 year MACRS schedule. That schedule is Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 .2 .32 .19 .12 .11 .06 It can be sold today for $800. If the firm sells the old machine in 5 years it will have no market value. The replacement machine will cost $20,000 and will also be depreciated using the 5 year MACRS schedule. The new machine will increase revenues by $6000 in the first year and will decrease costs by $2000 in the first year. The firm uses only debt and equity to fund its operations. The firm has 1000 bonds outstanding that have a par value of $1000. They currently see for $960 per bond, have 8 years left on their maturity, and have a coupon rate of 10%. They have 25000 shares of stock outstanding and each share sells for $80 per share. The equity has a beta of 1.2, the nominal risk free rate of interest is 5% and the expected real return on the market is 12%. The firm is in the 35% tax bracket. The firm currently has Net Operating Working Capital of $3000 for this project. It expects that number to grow 10% per year over the life of the project. Inflation is expected to be 2% per year. The firm expects to sell the new machine at the end of the 5th year for $2000. Build an excel spreadsheet that determines the NPV, IRR, and Discounted Payback for the machine. In your NPV analysis, use different discount rates for different riskiness of cash flows. For example, the depreciation tax shield is less risky than revenues.
Consider an asset that costs $228,800 and is depreciated straight-line to zero over its 11-year tax life. The asset is to be used in a 4-year project; at the end of the project, the asset can be sold for $28,600. If the relevant tax rate is 30 percen..
What are the firm’s Return on equity (ROE) and non operating return?
Interpret the inflation premium, default risk premium, maturity risk premium, and liquidity premium. Calculate a nominal interest rate given the risk free rate of return (r*) and all necessary premiums. Interpret and explain the term structure of int..
Alpha announced financial problems, and the terms of the bond were renegotiated overnight.
You deposit $100,000 cash in a brokerage account and purchase $200,000 of stocks on margin by borrowing $100000 from your broker, who requires a maintenance margin of 30%. What of the largest value for your stock holdings for which you will still rec..
Iron Ore What? (IOW) Casting Company is considering adding a new line to its product mix. Sydney Johnson, a recently minted MBA, will be conducting the capital budgeting analysis. What does the term “risk” mean in the context of capital budgeting? To..
A stock that pays a 1% dividend is currently trading at $40. What is the borrowing amount (B) on the 1-year call option with strike price of $40 if the volatility of the underlying stock is 20% and the continuous risk-free rate is 4%? Assume three (3..
WSM Wine Importers, Inc. purchased 75,000 cases of French wine at a cost of 6,000,000 Euros. If the current exchange rate is 0.7576 Euros to the U.S. dollar, what is the purchase price of the wine in U.S. dollars?
What changes would you recommend to the calculation of the carrying cost i?
Assume the company is now at the end of the final year of a project and 75% of the equipment cost has been depreciated. The firm can sell the used equipment today at the market price the exceeds equipment residual value How a taxable income will be c..
A company A has a higher days receivables outstanding ratio than company B therefore,
You have some extra cash this month and are considering putting it toward your car loan. Your interest rate 7%; your loan payments are $600 per month; and you have 36 months left on your loan. If you pay an additional $1000 with your next regular $60..
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