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Incremental Cash Flows and Project Evaluation
Classic Cars is considering expanding its product line by manufacturing classic Mustangs. The necessary equipment will cost $4,000,000 and installation costs will be $50,000. The equipment will be depreciated using a 5 year MACRS life with depreciation rates of 20%, 32%, 19.2%, 11.52% and 11.52%in Years 1-5, respectively. Projected sales in units will be 300/year for each of the next 5 years. The sales price is projected at $27,000 per car and variable costs at $18,000 per car. Fixed costs of the firm will increase by $1,200,000 per year. The company would anticipate selling the equipment for $500,000at the end of year five. To support the new operation, the company anticipates having to increase its net working capital by $600,000 at the beginning of the project, but will no longer need to maintain the higher level of working capital once it sells the equipment. If the company’s tax rate on ordinary income is 35%, its tax rate on capital gains is 15%, and its WACC is 12%, should the company do the project?
Analyze the balance sheet, income statement and statement of cash flows for the company. Your analysis should be two paragraphs in length
RAK Corp. is evaluating a project with the following cash flows: Year Cash Flow 0 –$ 28,000 1 10,200 2 12,900 3 14,800 4 11,900 5 – 8,400 The company uses a discount rate of 13 percent and a reinvestment rate of 6 percent on all of its projects.
An investment project provides cash inflows of $735 per year for eight years.
Calculating Present Values. Suppose you are still committed to owning a $150,000 Ferrari. If you believe your mutual fund can achieve a 10.25 percent annual rate of return, and you want to buy the car in 10 years on the day you turn 30, how much must..
Suppose Acap Corporation will pay a dividend of $2.75 per share at the end of this year and $3.09 per share next year. You expect Acap's stock price to be $53.54 in two years. Assume that Acap's equity cost of capital is 10.5%. What price would you b..
A bond issued by Standard Oil worked as follows. The holder received no interest. At the bond’s maturity the company promised to pay $1,000 plus an additional amount based on the price of oil at that time. The additional amount was equal to the produ..
A five-year project has an initial fixed asset investment of $320,000, an initial NWC investment of $32,000, and an annual OCF of -$31,000. The fixed asset is fully depreciated over the life of the project and has no salvage value. If the required re..
Loaded-Up Fund charges a 12b-1 fee of 1% and maintains an expense ratio of 0.60%. Economy Fund charges a front-end load of 2%, but has no 12b-1 fee and an expense ratio of 0.40%. Assume the rate of return on both funds’ portfolios (before any fees) i..
Your firm is considering a new product development. an outlay of $90,000 is required for equipment, and an additional net working capital of $5000 is required. the project is expected to have a 4 year life, and the equipment will be depreciated on a ..
The returns on stocks A and B are perfectly negatively correlated (Pab=-1). Stock A has an expected return of 21 % and a standard deviation of return of 40%. Stock B has a standard deviation of return of 20%. The risk-free rate of interest is 11 %. W..
(Capital Asset Pricing Model) The expected return for the general market is 11.0 percent, and the risk premium in the market is 6.4 percent. Tasaco, LBM, and Exxos have betas of 0.831, 0.696, and 0.576, respectively. What are the appropriate expected..
The 6-month U. S. T-bills have a nominal rate of 8%, while the default-free German bonds that mature in 6 months have a nominal rate of 6%. In the spot exchange market, one euro equals $0.70. If interest rate parity holds, what is the 6-month forward..
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