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A firm is considering an investment in a new machine with a price of $18 million to replace its existing machine. The current machine has a book value of $6 million and a market value of $4.5 million. The new machine is expected to have a four-year life, and the old machine has four years left in which it can be used. If the firm replaces the old machine with the new machine, it expects to save $6.7 million in operating costs each year over the next four years. Both machines will have no salvage value in four years. If the firm purchases the new machine, it will also need an investment of $250,000 in net working capital. The required return on the investment is 10 percent, and the tax rate is 39 percent. Assume the company uses straight-line depreciation.
a. What is the NPV if they purchase the new machine?
b. What is the NPV if they keep the old machine?
c. Should the firm buy the new machine now or not?
A stock price is $103 per share, exercise price of the options is $100 per share, all options are European and the stock does not pay any dividend. Option contracts are written on 100 shares of stock and mature in 6 months. The call price is $9 per s..
Present value: Jack Robbins is saving for a new car. He needs to have $ 21,000 for the car in three years. How much will he have to invest today in an account paying 8 percent annually to achieve his target?
Faro techologies has 400 million shares outstanding trading at $5 a share.The company announces its intention to raise $200 million by selling new shares. What do market signaling studies suggest will happen to Faro's stock Price on the announcement ..
Large cap stocks had the nominal rates of return of 11.98%. The rate of inflation during the last year was 2.57 percent. What is the real rate of return for large cap stocks.
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As a financial analyst, you are tasked with evaluating a capital budgeting project. You were instructed to use the IRR method and you need to determine an appropriate hurdle rate. The risk-free rate is 4% and the expected market rate of return is 11%..
A 5-year Treasury bond has a 4.85% yield. A 10-year Treasury bond yields 6.3%, and a 10-year corporate bond yields 8.65%. The market expects that inflation will average 2.1% over the next 10 years (IP10 = 2.1%). (Hint: Remember that the default risk ..
The last dividend was $2.50, but now is expected to grow at 10% forever, and Ke remains 25%, what would the price be now? Things are not as great as originally thought. The last dividend was $2.50. It is expected to grow by 10% for only the next 3 y..
One year ago, the Jenkins Family Fun Center deposited $4,800 in an investment account for the purpose of buying new equipment four years from today. Today, they are adding another $6,600 to this account. They plan on making a final deposit of $8,800 ..
An investor bought 400 shares of stock when its price was $40/share. The price of the stock is now up to $75/share and the investor decides to hedge his position by purchasing 4 puts (premium = $7.50, exercise price of 75). What is the value of a put..
Boyd Company sold a futures contract (one) on Treasury bonds that specified a price of 93-00. When the position was closed out, the price of the Treasury bond futures contract was 94-20. Did interest rates increase or decrease? How do you know? What ..
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