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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 6million and a market value of $4.5 million. The new machine 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. What are the NPV and IRR of the decision to replace the old machine?
Suppose an individual invests $31,000 in a load mutual fund for two years. The load fee entails an up-front commission charge of 3.5 percent of the amount invested and is deducted from the original funds invested. In addition, annual fund operating e..
How much should he put away each month to have the equivalent of $500,000 in 20 years if the interest he can earn is 5%? If the interest rate changes to 3%, what will Jetison need to save each month?
Parker & Stone, Inc., is looking at setting up a new manufacturing plant in South Park to produce garden tools. The company bought some land six years ago for $5.5 million in anticipation of using it as a warehouse and distribution site, but the comp..
Bill Blank signed an $8,150 note at Citizen’s Bank. Citizen’s charges a 6.4 % discount rate. Assume the loan is for 310 days. Find the proceeds. Find the effective rate charged by the bank.
The current spot rate between Euros and dollars is €1.25/$. You believe that the euro will depreciate relative to the dollar over the next six months and you'd like to use the forward market to trade based on your belief. Find your profit/loss on you..
Lee Michaels Jewelers recently issued a $1,000 face, 10 year zero coupon bond. The initial offering sold in January, 2008 for $500. Despite the fact that the bond doesn’t pay interest, the IRS says you must declare the implicit interest for tax purpo..
One advantage of forward contracts is that they are default free. Futures contracts generally trade on an organized exchange and are marked to market daily. Goods are never delivered under forward contracts but are almost always delivered under futur..
The Poseidon Swim company produces swim trunks. The average selling price for one of their swim trunks is $70.30. The variable cost per unit is $23.99. Poseidon Swim has average fixed costs per year of $9,452. Assume that current level of sales is 47..
Chasteen, Inc. is considering an investment with an initial cost of $185,000 that would be depreciated straight-line to a zero book value over the life of the project. The cash inflows generated by the project are estimated at $76,000 for the first t..
A company has $317,000 in credit sales. The company uses the allowance method to account for uncollectible accounts, and the Allowance for Doubtful Accounts now was an $8,150 debit balance. If the company estimates 6% of credit sales will be uncollec..
Kyle has $1,000 in cash received for high school graduation gifts from various relatives. He wants to invest it in a certificate of deposit (CD) so that he will have a down payment on a car when he graduates from college in five years. His bank will ..
A firm has an expected perpetual EBIT = $6,000. The unlevered cost of capital = 8% and there are 20,000 shares of stock outstanding. The firm is considering issuing $10,000 in new par bonds to add financial leverage to the firm. What is the value of ..
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