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Wacky Widgets, Incorporated is considering a new three-year expansion project to make new Widgets. It requires an initial fixed investment of $2.7 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life, after which it will be sold for $50,000 to a scrapyard. The fixed asset will take 2 years to install, so subsequent sales increases will occur in years 2 -4. The project is estimated to generate $2,800,000 in annual sales, with variable costs of 40 percent. There are no fixed costs, and working capital requirements are 5% of annual revenues. The tax rate is 35 percent and the required rate of return is 15 percent. The risk-free rate is 9 percent. Your firm requires a payback period of 3 years to approve a project. The Widget produced by this product will often go to the same customers as the Bidget,another product produced by Wacky Widgets. They will often be shipped in the same package as another product the firm produces. It will not reduce the overhead on producing Widgets, but it will reduce the cost of shipping Bidgets by $20,000 per year in years 2 -4. a) Construct a full pro-forma statement for this project’s projected incremental cash flows. b) What is the payback period? Based on this decision rule, should you do the project? c) What is the discounted payback period? Based on this decision rule, should you do the project? d) What is the NPV? Based on this decision rule, should you do the project? e) What is the IRR? Based on this decision rule, should you do the project? f) What is the profitability index? Based on this decision rule, should you do the project? g) Should you approve the project? What decision rule are you using to make your final decision?
The Green Fiddle is considering a project that will produce sales of $87,000 a year for the next four years. The profit margin is 6 percent, the project cost is $96,000, and depreciation is straight-line to a zero book value over the life of the proj..
Using the existing budget, create a new budget for the next fiscal year. Set out the details of all the assumptions you needed in order to build this budget. 2. Use the “Checklist for Building a Budget” (Exhibit 15–2) and critique your own effort. 3...
Calculate the payback period for each of the following projects, then select your project based on the payback period criterion: Project A has a cost of $15,000, returns $4,000 after-tax the first year and this amount increases by $1,000 annually ove..
find the present value of the dividend stream; that is, calculate the PVs of D1, D2, and D3 and then sum these PVs.
Kelso Electric is debating between a leveraged and an unleveraged capital structure. The all equity capital structure would consist of 40,000 shares of stock. The debt and equity option would consist of 25,000 shares of stock plus $280,000 of debt wi..
Explain the relationship between reserve requirements and the size of money market mutual funds. The free-rider problem never arises in the debt market.
Would you pay $875 for each bond if you thought that a "fair" market interest rate for such bonds was 12%-that is, if rd = 12%?
Gluon Inc. is considering the purchase of a new high pressure glueball. It can purchase the glueball for $110,000 and sell its old low-pressure glueball, which is fully depreciated, for $20,000. What is the equivalent annual savings from the purchase..
Harrison Corporation is interested in acquiring Van Buren Corporation. Assume that the risk-free rate of interest is 4% and the market risk premium is 8%. Van Buren currently expects to pay a year-end dividend of $1.85 a share (D1 = $1.85). Van Buren..
Smyth Industries operated as a monopolist for the past several years, earning annual profits amounting to $58 million,
what price will you pay for it?
The merchandise trade deficit indicates a net outflow of U.S. dollars as the result of
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