Reference no: EM132755223

1. Mars Inc. is considering the purchase of a new machine which will reduce manufacturing costs by $5,000 annually. The machine falls into the MACRS 3-yr class, (33%, 45%, 15%, and 7%) and it would be sold at the end of its 2-year operating life for $1,800. The machine would require an increase in net working capital by $2,000 when the machine is installed, but required working capital will return to the original level when the machine is sold after 2 years. Mars's marginal tax rate is 40 percent, and it uses a 12 percent cost of capital to evaluate projects of this nature. If the machine costs $6,000 and the installation cost is $1,000, what is the project's NPV?

2. The Marcos Company issued $100,000 of 30-year, $1,000 par value bonds with a coupon rate of 7% ten years ago. The bonds with a call price of $1,040 were sold at a discount of $30 per bond. The initial flotation cost was $6,000. The company wishes to sell a $100,000 new issue of 6%, 20-year bonds in order to retire its existing bonds. The company intends to sell its new bonds at their face value of $1,000 per bond. The flotation costs of the new issue are estimated to be $8,000. The company's marginal tax rate is 40% and the new bonds are sold three months before the old bonds are called. What is the annual net cash outflow (ANCO) on the old bonds?

3. You are considering the purchase of a common stock that just paid a dividend of $4.00 (D0 = $4.00). You expect this stock to have a growth rate of 8 percent per year for two years from t=0 to t=2, and then to have a long-run normal growth rate of 4 percent from t=2. If you require a 14 percent rate of return, how much should you be willing to pay for this stock?