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One year ago, your company purchased a machine used in manufacturing for $120,000. You have learned that a new machine is available that offers many advantages; you can purchase it for $140,000 today. It will be depreciated on a straight-line basis over 10 years, after which it has no salvage value. You expect that the new machine will produce EBITDA (earning before interest, taxes, depreciation, and amortization) of $40,000 per year for the next 10 years. The current machine is expected to produce EBITDA of $25,000 per year. The current machine is being depreciated on a straight-line basis over a useful life of 11 years, after which it will have no salvage value, so depreciation expense for the current machine is $10,909 per year. All other expenses of the two machines are identical. The market value today of the current machine is $50,000. Your company’s tax rate is 42%, and the opportunity cost of capital for this type of equipment is 12%. Is it profitable to replace the year-old machine?
River Cruises is all-equity-financed with 100,000 shares. It now proposes to issue $280,000 of debt at an interest rate of 12% and use the proceeds to repurchase 28,000 shares at $10 per share. Profits before interest are expected to be $128,000. Wha..
If you needed to trade immediately and were not concerned with the price the trade "crossed" (or traded) at, nor were you particularly concerned with how much the implicit cost of liquidity happened to be, and you were not concerned with how far pr..
Bank of America has bonds that pay a coupon interest rate of 8.5 percentand mature in 30 years. If an investor has a required rate of return of 4.5 percent, what should she be willing to pay for the bond? What happens if she pays more or less?
Maxwell Communications paid a dividend of $2.00 last year. Over the next 12 months, the dividend is expected to grow at 10 percent, which is the constant growth rate for the firm (g). The new dividend after 12 months will represent D1. The required r..
You are considering a project with the following data: IRR = 8.7 percent; PI = .98; NPV = -$393; Payback period = 2.44 years. Which one of the following statements is correct given this information? This project should be accepted based on the profit..
Your company has spent $230,000 on research to develop a new computer game. The firm is planning to spend $43,000 on a machine to produce the new game. The firm has a tax rate of 35 percent, an opportunity cost of capital of 12 percent, and it expect..
Paw Patrol is considering2 different capital structures. Structure A is 100% equity with 150,00 shares outstanding and $500,000 market value. Structure B is 50/50 debt/equity split with total market value of $500,00. Rate on debt will be 10%, assume ..
Your firm needs to invest in a new delivery truck. The life expectancy of the delivery truck is five years. You can purchase a new delivery truck for an upfront cost of $200,000, or you can lease a truck from the manufacturer for five years for a mon..
According to the textbook, the net present value rule states that “An investment should be accepted if the net present value is positive and rejected if it is negative.” What does a net present value of zero mean? If you were analyzing a project with..
Calculate the after-tax return this investor will earn if she sells GMC stock at the current $54 stock price prior to the ex-dividend date.
Deferred annuity is purchased with annual payments for twenty-five years. The first payment of 500 starts at the end of the tenth year and subsequent payments increase 3% per year. Find the purchase price of the annuity if the effective annual intere..
Small Corporation would like to forecast the value of the Cyprus pound (CYP) five years from now using forward rates. Unfortunately, Small is unable to obtain quotes for five year forward contracts. However, Small observes that the five year interest..
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