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1. CF Estimation. Stanton Inc. is considering the purchase of a new machine which will increase earnings before depreciation and taxes by $6,000 annually. Stanton will use the straightline method to depreciate the machine down to zero, and it expects to sell the machine at the end of its 5-year operating life for $10,000 before taxes. Stanton’s marginal tax rate is 40%, and it uses 9% cost of capital to evaluate projects of this type. If the net cost of the machine is $40,000, what is the project’s NPV? Hint: depreciation is $8,000 per year.
$12,800
-$9,650.78
-$1,200
None of the above
2. In relating the Black-Scholes Option Pricing Model to the market value of a firm’s equity, what is the intrinsic value of the “option” if the face value of debt is LESS than the firm’s value?
Zero
Firm value – debt value
Debt value – firm value
Negative
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