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1. Explain the factors that determine beta and how an asset beta can differ from equity betas.
2. Thornley Machines is considering a 3-year project with an initial cost of $618,000. The project will not directly produce any sales but will reduce operating costs by $265,000 a year. The equipment is depreciated straight-line to a zero book value over the life of the project. At the end of the project the equipment will be sold for an estimated $60,000. The tax rate is 34%. The project will require $23,000 in extra inventory for spare parts and accessories. Should this project be implemented if Thornley's requires a 9% rate of return? Why or why not?
Note: OCF is given: $265,000. Compute the initial Cash out flow and the Terminal Cash flow.
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Thornley believes that it could save $265,000 in operating costs by embarking on a no-sales generating project with a 3-year life that costs $618,000 with after-tax salvage value of $39,600. However, Thornley wants to determine whether embarking on the project will add value to shareholders wealth at an acceptable hurdle rate of 9%
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