Reference no: EM13814057
(Comprehensive problem) The Shome Corporation, a firm in the 34 percent marginal tax bracket with a 15 percent required rate of return or cost of capital, is considering a new project. The project involves the introduction of a new product. This project is expected to last 5 years and then, because this is somewhat of a fad product, be terminated. Given the following information, determine the free cash flows associated with the project, the project’s net present value, the profitability index, and the internal rate of return. Apply the appropriate decision criteria.
Cost of new plant and equipment $6,900,000
Shipping and installation costs $ 100,000
Unit sales
Year Units Sold
1 80,000
2 100,000
3 120,000
4 70,000
5 70,000
Sales price per unit $250/unit in years 1 through 4, $200/unit in year 5
Variable cost per unit $130/units
Annual fixed costs $300,000 per year in years 1–5
Working-capital requirements There will be an initial working-capital requirement of $100,000 just to get production started. For each year, the total investment in net working capital will be equal to 10 percent of the dollar value of sales for that year. Thus, the investment in working capital will increase during years
1 through 3, then decrease in year 4. Finally, all working capital is liquidated at the termination of the project at the end of year 5.
The depreciation method Use the simplified straight-line method over 5 years. Assume that the plant and equipment will have no salvage value after 5 years.
|
Assumes reinvestments of interim cash flows
: In capital budgeting, the IRR implicitly assumes reinvestments of interim cash flows at the IRR itself. First, discuss why this assumption is problematic. Then, explain how MIRR address this issue by presenting your own unique example with proper cal..
|
|
Determine the present value of replacing the fleet
: Adams County has 80 older model school buses that carry a present salvage value of $15,000 each. The county officials are contemplating replacing all the buses with 70 new larger ones, each costing $115,000. Determine the Present Value of replacing t..
|
|
What is its self supporting growth rate
: Maggie’s Muffins, Inc., generated $5,000,000 in sales during 2013, and its year-end total assets were $2,500,000. Also, at year-end 2013, current liabilities were $1,000,000, consisting of $300,000 of notes payable, $500,000 of accounts payable, and ..
|
|
Without having to employ no spontaneous external funds
: A0*/S0 = 1.6; L0*/S0 = 0.4; profit margin = 0.10; and dividend payout ratio = 0.45, or 45%. Sales last year were $100 million. Assuming that these ratios will remain constant, use the AFN equation to determine the firm’s self-supporting growth rate—i..
|
|
Working-capital requirements
: The Shome Corporation, a firm in the 34 percent marginal tax bracket with a 15 percent required rate of return or cost of capital, is considering a new project. The project involves the introduction of a new product. Working-capital requirements Ther..
|
|
Performing a hypothesis test
: When performing a hypothesis test, you must make an assumption inorder to perform it. Assume that the hypothesis you are testing (the nullhypothesis) is true. This assumption allows you to calculate the probability ofthe test results. You then use th..
|
|
Future value if the interest rate is a simple interest rate
: Find the future value of $10,000 invested now after five years if the annual interest rate is 8 percent. What would be the future value if the interest rate is a simple interest rate? What would be the future value if the interest rate is a compound ..
|
|
Common equity if the respective costs for these components
: What is the WACC for a firm with 20% debt, 10% preferred stock, and 70% common equity if the respective costs for these components are 8% before the cost of debt, 12% before tax costs of preferred stock, and 18% before tact cost of common equity? The..
|
|
What is the payout ratio
: A company has dividend of $2 per share, earnings per share of $8 and plowback ratio of 75%. What is the payout ratio?
|