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essentials corporate finance
Corporate Finance 12th edition Stephen Ross, Randolph Westerfield, Jeffrey Jaffe, Bradford Jordan - Solutions
Herjavec Enterprises is thinking about introducing a new surface cleaning machine. The marketing department has come up with the estimate that the company can sell 20 units per year at $235,000 net cash flow per unit for the next five years. The engineering department has come up with the estimate
You are the financial analyst for a tennis racket manufacturer. The company is considering using a graphitelike material in its tennis rackets. The company has estimated the information in the following table about the market for a racket with the new material. The company expects to sell the
Consider a project to supply Detroit with 26,000 tons of machine screws annually for automobile production. You will need an initial $2,900,000 investment in threading equipment to get the project started; the project will last for five years. The accounting department estimates that annual fixed
Consider the following project for Hand Clapper, Inc. The company is considering a 4-year project to manufacture clap-command garage door openers. This project requires an initial investment of $18 million that will be depreciated straight-line to zero over the project’s life. An initial
M.V.P. Games, Inc., has hired you to perform a feasibility study of a new video game that requires an initial investment of $9.5 million. The company expects a total annual operating cash flow of $1.8 million for the next 10 years. The relevant discount rate is 10 percent. Cash flows occur at
You are considering a new product launch. The project will cost $720,000, have a 4-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 380 units per year; price per unit will be $17,400; variable cost per unit will be $14,100; and fixed costs will be
Consider a project with the following information: Initial fixed asset investment = $485,000; straight-line depreciation to zero over the 4-year life; zero salvage value; price = $41; variable costs = $24; fixed costs = $189,000; quantity sold = 90,000 units; tax rate = 23 percent. How sensitive is
James, Inc., has purchased a brand new machine to produce its High Flight line of shoes. The machine has an economic life of five years. The depreciation schedule for the machine is straight-line with no salvage value. The machine costs $530,000. The sales price per pair of shoes is $75, while the
You are considering investing in a company that cultivates abalone to sell to local restaurants. Use the following information:Sales price per abalone = $43Variable costs per abalone
B&B has a new baby powder ready to market. If the firm goes directly to market with the product, there is only a 55 percent chance of success. However, the firm can conduct customer segment research, which will take a year and cost $875,000. By going through research, B&B will be able to
The manager for a growing firm is considering the launch of a new product. If the product goes directly to market, there is a 50 percent chance of success. For $155,000 the manager can conduct a focus group that will increase the product’s chance of success to 65 percent. Alternatively, the
Ang Electronics, Inc., has developed a new DVDR. If successful, the present value of the payoff (when the product is brought to market) is $24 million. If the DVDR fails, the present value of the payoff is $8.5 million. If the product goes directly to market, there is a 50 percent chance of
Your company is deciding whether to invest in a new machine. The new machine will increase cash flow by $435,000 per year. You believe the technology used in the machine has a 10-year life; in other words, no matter when you purchase the machine, it will be obsolete 10 years from today. The machine
Ayden’s Toys, Inc., purchased a $435,000 machine to produce toy cars. The machine will be fully depreciated by the straight-line method over its 5-year economic life. Each toy sells for $16. The variable cost per toy is $5 and the firm incurs fixed costs of $295,000 per year. The corporate tax
In each of the following cases, find the unknown variable. Ignore taxes. Unit Accounting Unit Variable Cost Fixed Depreciation Break-Even Price Costs $42 $30 $ 820,000 64 2,750,000 95,800 143,806 7,835 $1,150,000 97 245,000 105,000
We are evaluating a project that costs $604,000, has an 8-year life, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at 55,000 units per year. Price per unit is $36, variable cost per unit is $17, and fixed costs are
J. Smythe, Inc., manufactures fine furniture. The company is deciding whether to introduce a new mahogany dining room table set. The set will sell for $5,900, including a set of eight chairs. The company feels that sales will be 1,800, 2,150, 2,600, 2,350, and 2,200 sets per year for the next five
After extensive medical and marketing research, Pill, Inc., believes it can penetrate the pain reliever market. It is considering two alternative products. The first is a medication for headache pain. The second is a pill for headache and arthritis pain. Both products would be introduced at a price
Kopperud Electronics has an investment opportunity to produce a new HDTV. The required investment on January 1 of this year is $115 million. The firm will depreciate the investment to zero using the straight-line method over four years. The investment has no resale value after completion of the
The Biological Insect Control Corporation (BICC) has hired you as a consultant to evaluate the NPV of its proposed toad ranch. The company plans to breed toads and sell them as ecologically desirable insect control mechanisms. They anticipate that the business will continue into perpetuity.
Hardwick Enterprises is evaluating alternative uses for a three-story manufacturing and warehousing building that it has purchased for $1.45 million. The company can continue to rent the building to the present occupants for $75,000 per year. The present occupants have indicated an interest in
Suppose we are thinking about replacing an old computer with a new one. The old one cost us $450,000; the new one will cost $580,000. The new machine will be depreciated straight-line to zero over its 5-year life. It will probably be worth about $130,000 after five years.The old computer is being
Your company has been approached to bid on a contract to sell 18,000 voice recognition (VR) computer keyboards per year for four years. Due to technological improvements, beyond that time they will be outdated and no sales will be possible. The equipment necessary for the production will cost $3.6
The technique for calculating a bid price can be extended to many other types of problems. Answer the following questions using the same technique as setting a bid price; that is, set the project NPV to zero and solve for the variable in question.a. In the previous problem, assume that the price
Guthrie Enterprises needs someone to supply it with 145,000 cartons of machine screws per year to support its manufacturing needs over the next five years, and you’ve decided to bid on the contract. It will cost $2.1 million to install the equipment necessary to start production; you’ll
A proposed cost-saving device has an installed cost of $645,000. The device will be used in a 5-year project but is classified as 3-year MACRS property for tax purposes. The required initial net working capital investment is $55,000, the marginal tax rate is 21 percent, and the project discount
Aday Acoustics, Inc., projects unit sales for a new seven-octave voice emulation implant as follows:Year Unit Sales1 ............................. 73,0002 .............................
Dickinson Brothers, Inc., is considering investing in a machine to produce computer keyboards. The price of the machine will be $1.2 million, and its economic life is five years. The machine will be fully depreciated by the straight-line method. The machine will produce 25,000 keyboards each year.
Calligraphy Pens is deciding when to replace its old machine. The machine’s current salvage value is $2.8 million. Its current book value is $1.6 million. If not sold, the old machine will require maintenance costs of $855,000 at the end of the year for the next five years. Depreciation on the
You have been hired as a consultant for Pristine Urban-Tech Zither, Inc. (PUTZ), manufacturers of fine zithers. The market for zithers is growing quickly. The company bought some land three years ago for $1 million in anticipation of using it as a toxic waste dump site but has recently hired
With the growing popularity of casual surf print clothing, two recent MBA graduates decided to broaden this casual surf concept to encompass a “surf lifestyle for the home.” With limited capital, they decided to focus on surf print table and floor lamps to accent people’s homes. They
Amazing Manufacturing, Inc., has been considering the purchase of a new manufacturing facility for $650,000. The facility is to be fully depreciated on a straight-line basis over seven years. It is expected to have no resale value at that time. Operating revenues from the facility are expected to
A firm is considering an investment in a new machine with a price of $15.6 million to replace its existing machine. The current machine has a book value of $5.4 million and a market value of $4.1 million. The new machine is expected to have a 4-year life, and the old machine has four years left in
Market Top Investors, Inc., is considering the purchase of a $385,000 computer with an economic life of five years. The computer will be fully depreciated over five years using the straight-line method, at which time it will be worth $30,000. The computer will replace two office employees whose
Bridgton Golf Academy is evaluating new golf practice equipment. The “Dimple-Max” equipment costs $97,000, has a 3-year life, and costs $10,600 per year to operate. The relevant discount rate is 12 percent. Assume that the straight-line depreciation method is used and that the equipment is
Phillips Industries runs a small manufacturing operation. For this fiscal year, it expects real net cash flows of $345,000. The company is an ongoing operation, but it expects competitive pressures to erode its real cash flows at 3 percent per year in perpetuity. The appropriate real discount rate
Lo, Inc., is considering an investment of $435,000 in an asset with an economic life of five years. The firm estimates that the nominal annual cash revenues and expenses at the end of the first year will be $275,000 and $87,000, respectively. Both revenues and expenses will grow thereafter at the
Consider the following cash flows on two mutually exclusive projects: The cash flows of Project A are expressed in real terms, whereas those of Project B are expressed in nominal terms. The appropriate nominal discount rate is 11 percent and the inflation rate is 4 percent. Which project should
Vandelay Industries is considering the purchase of a new machine for the production of latex. Machine A costs $1.98 million and will last for six years. Variable costs are 35 percent of sales and fixed costs are $187,000 per year. Machine B costs $5,400,000 and will last for nine years.Variable
Eggz, Inc., is considering the purchase of new equipment that will allow the company to collect loose hen feathers for sale. The equipment will cost $425,000 and will be eligible for 100 percent bonus depreciation. The equipment can be sold for $45,000 at the end of the project in five years. Sales
Suppose in the previous problem that HISC always needs a conveyor belt system; when one wears out, it must be replaced. Which system should the firm choose now?Data from previous problemHagar Industrial Systems Company (HISC) is trying to decide between two different conveyor belt systems. System A
Hagar Industrial Systems Company (HISC) is trying to decide between two different conveyor belt systems. System A costs $265,000, has a 4-year life, and requires $73,000 in pretax annual operating costs. System B costs $380,000, has a 6-year life, and requires $64,000 in pretax annual operating
Starset Machine Shop is considering a 4-year project to improve its production efficiency. Buying a new machine press for $670,000 is estimated to result in $245,000 in annual pretax cost savings. The press falls in the 5-year MACRS class, and it will have a salvage value at the end of the project
You are evaluating two different silicon wafer milling machines. The Techron I costs $265,000, has a 3-year life, and has pretax operating costs of $41,000 per year. The Techron II costs $330,000, has a 5-year life, and has pretax operating costs of $52,000 per year. For both milling machines, use
Thurston Petroleum is considering a new project that complements its existing business. The machine required for the project costs $4.1 million. The marketing department predicts that sales related to the project will be $2.35 million per year for the next four years, after which the market will
An asset used in a 4-year project falls in the 5-year MACRS class for tax purposes. The asset has an acquisition cost of $7.6 million and will be sold for $1.4 million at the end of the project. If the tax rate is 21 percent, what is the aftertax salvage value of the asset?
In the previous problem, suppose the fixed asset actually qualifies for 100 percent bonus depreciation. All the other facts are the same. What is the new NPV?Data from previous problemDog Up! Franks is looking at a new sausage system with an installed cost of $375,000. This cost will be depreciated
Dog Up! Franks is looking at a new sausage system with an installed cost of $375,000. This cost will be depreciated straight-line to zero over the project’s 5-year life, at the end of which the sausage system can be scrapped for $25,000. The sausage system will save the firm $95,000 per year in
Your firm is contemplating the purchase of a new $575,000 computer-based order entry system. The system will be depreciated straight-line to zero over its 5-year life. It will be worth $60,000 at the end of that time. You will save $176,000 before taxes per year in order processing costs, and you
In the previous problem, suppose the project requires an initial investment in net working capital of $250,000 and the fixed asset will have a market value of $230,000 at the end of the project. What is the project’s Year 0 net cash flow? Year 1? Year 2? Year 3? What is the new NPV?Data from
Down Under Boomerang, Inc., is considering a new 3-year expansion project that requires an initial fixed asset investment of $1.42 million. The fixed asset will be depreciated straight-line to zero over its 3-year tax life, after which it will be worthless. The project is estimated to generate
The Best Manufacturing Company is considering a new investment. Financial projections for the investment are tabulated here. The corporate tax rate is 22 percent. Assume all sales revenue is receiv ? ?ed in cash, all operating costs and income taxes are paid in cash, and all cash flows occur at the
Paul Restaurant is considering the purchase of a $9,300 soufflé maker. The soufflé maker has an economic life of five years and will be fully depreciated by the straight-line method. The machine will produce 1,400 soufflés per year, with each costing $1.97 to make and priced at $4.95. The
Suppose the following two independent investment opportunities are available to Fitz, Inc. The appropriate discount rate is 8.5 percent. a. Compute the profitability index for each of the two projects. b. Which project(s) should the company accept based on the profitability index rule? Year
The treasurer of Amaro Canned Fruits, Inc., has projected the cash flows of Projects A, B, and C as follows: Suppose the relevant discount rate is 12 percent per year. a. Compute the profitability index for each of the three projects. b. Compute the NPV for each of the three projects. c. Suppose
Consider the following cash flows of two mutually exclusive projects for Tokyo Rubber Company. Assume the discount rate for both projects is 8 percent. a. Based on the payback period, which project should be taken? b. Based on the NPV, which project should be taken? c. Based on the IRR, which
You have won the lottery. You will receive $5,500,000 today, and then receive 40 payments of $1,900,000. These payments will start one year from now and will be paid every six months. A representative from Greenleaf Investments has offered to purchase all the payments from you for $35 million. If
A financial planning service offers a college savings program. The plan calls for you to make six annual payments of $9,000 each, with the first payment occurring today on your child’s 12th birthday. Beginning on your child’s 18th birthday, the plan will provide $20,000 per year for four years.
Your financial planner offers you two different investment plans. Plan X is a $25,000 annual perpetuity. Plan Y is a 10-year, $51,000 annual annuity. Both plans will make their first payment one year from today. At what discount rate would you be indifferent between these two plans?
Inc., has the following mutually exclusive projects. a. Suppose the company?s payback period cutoff is two years. Which of these two projects should be chosen? b. Suppose the company uses the NPV rule to rank these two projects. Which project should be chosen if the appropriate discount rate is
Seth Bullock, the owner of Bullock Gold Mining, is evaluating a new gold mine in South Dakota. Dan Dority, the company’s geologist, has just finished his analysis of the mine site. He has estimated that the mine would be productive for eight years, after which the gold would be completely mined.
An investment project provides cash inflows of $640 per year for 8 years. What is the project payback period if the initial cost is $2,700? What if the initial cost is $3,900? What if it is $6,800?
An investment project has annual cash inflows of $5,000, $5,500, $6,000, and $7,000, and a discount rate of 11 percent. What is the discounted payback period for these cash flows if the initial cost is $8,000? What if the initial cost is $12,000? What if it is $16,000?
An investment project costs $15,100 and has annual cash flows of $3,900 for 6 years. What is the discounted payback period if the discount rate is 0 percent? What if the discount rate is 10 percent? If it is 17 percent?
Vital Silence, Inc., has a project with the following cash flows:Year Cash Flows0 ..................... −$27,0001 ..................... 13,1002 ..................... 17,2003
In June 2017, BMW announced plans to spend $600 million to expand production at its South Carolina plant. The new investment would allow BMW to prepare for new X model SUVs. BMW apparently felt it would be better able to compete and create value with a U.S.-based facility. In fact, BMW expected to
Compute the internal rate of return for the cash flows of the following two projects: Project B Project A Year -$7,300 -$4,390 3,940 2,170 2,210 3,450 3 2,480 1,730
Bill plans to open a self-serve grooming center in a storefront. The grooming equipment will cost $325,000, to be paid immediately. Bill expects aftertax cash inflows of $67,000 annually for 7 years, after which he plans to scrap the equipment and retire to the beaches of Nevis. The first cash
Suppose you are offered $8,700 today butmust make the following payments:Year Cash Flows0 ........................... $ 8,7001 .......................... −3,9002 ..........................
Consider the following cash flows on two mutually exclusive projects for the Bahamas Recreation Corporation (BRC). Both projects require an annual return of 14 percent. As a financial analyst for BRC, you are asked the following questions: a. If your decision rule is to accept the project with the
Cori?s Sausage Corporation is trying to choose between the following two mutually exclusive design projects: a. If the required return is 10 percent and the company applies the profitability index decision rule, which project should the firm accept? b. If the company applies the NPV decision
Howell Petroleum, Inc., is trying to evaluate a generation project with the following cash flows:Year Cash Flow0 ............................. −$65,000,0001
Wii Brothers, a game manufacturer, has a new idea for an adventure game. It can market the game either as a traditional board game or as an interactive DVD, but not both. Consider the following cash flows of the two mutually exclusive projects for the company. Assume the discount rate for both
Hanmi Group, a consumer electronics conglomerate, is reviewing its annual budget in wireless technology. It is considering investments in three different technologies to develop wireless communication devices. Consider the following cash flows of the three independent projects available to the
Consider the following cash flows of two mutually exclusive projects for AZ-Motorcars. Assume the discount rate for both projects is 10 percent. a. Based on the payback period, which project should be accepted? b. Based on the NPV, which project should be accepted? c. Based on the IRR, which
Consider two mutually exclusive new product launch projects that Nagano Golf is considering. Assume the discount rate for both products is 15 percent. Project ? ?Nagano NP-30. A: ? ?Professional clubs that will take an initial investment of $735,000 at Year 0. For each of the next 5 years (Years
An investment under consideration has a payback of six years and a cost of $573,000. If the required return is 11 percent, what is the worst-case NPV? The best-case NPV? Explain. Assume the cash flows are conventional.
This problem is useful for testing the ability of financial calculators and computer software. Consider the following cash flows. How many different IRRs are there? When should we take this project?Year Cash Flow0
The Yurdone Corporation wants to set up a private cemetery business. According to the CFO, Barry M. Deep, business is “looking up.” As a result, the cemetery project will provide a net cash inflow of $415,000 for the firm during the first year, and the cash flows are projected to grow at a rate
The Utah Mining Corporation is set to open a gold mine near Provo, Utah. According to the treasurer, Monty Goldstein, “This is a golden opportunity.” The mine will cost $3,400,000 to open and will have an economic life of 11 years. It will generate a cash inflow of $575,000 at the end of the
Butler International Limited is evaluating a project in Erewhon. The project will create the following cash flows:Year Cash Flow0 .............................. −$945,0001
An insurance company is offering a new policy to its customers. Typically the policy is bought by a parent or grandparent for a child at the child’s birth. For this policy, the purchaser, say, the parent, makes the following six payments to the insurance company:First birthday:
What is the value of an investment that pays $50,000 every other year forever, if the first payment occurs one year from today and the discount rate is 9 percent compounded daily? What is the value today if the first payment occurs four years from today? Assume 365 days in a year.
A check-cashing store is in the business of making personal loans to walk-up customers. The store makes only 1-week loans at 7.1 percent interest per week.a. What APR must the store report to its customers? What is the EAR that the customers are actually paying?b. Now suppose the store makes
What is the value today of a 15-year annuity that pays $750 a year? The annuity’s first payment occurs 6 years from today. The discount rate is 8 percent for Years 1 through 5 and 11 percent thereafter.
Amanda Rice has arranged to purchase a $725,000 vacation home in the Bahamas with a 20 percent down payment. The mortgage has a 5.4 APR compounded monthly and calls for equal monthly payments over the next 30 years. Her first payment will be due one month from now. However, the mortgage has an
You receive a credit card application from Shady Banks Savings and Loan offering an introductory rate of 1.99 percent per year, compounded monthly for the first six months, increasing thereafter to 18 percent compounded monthly. Assuming you transfer the $12,400 balance from your existing credit
Young Pharmaceuticals is considering a drug project that costs $2.75 million today and is expected to generate end-of-year annual cash flows of $273,000 forever. At what discount rate would Young be indifferent between accepting or rejecting the project?
Southern California Publishing Company is trying to decide whether to revise its popular textbook Financial Psychoanalysis Made Simple. The company has estimated that the revision will cost $153,000. Cash flows from increased sales will be $41,000 the first year. These cash flows will increase by 4
Your job pays you only once a year for all the work you did over the previous 12 months. Today, December 31, you received your salary of $74,500, and you plan to spend all of it. However, you want to start saving for retirement beginning next year.You have decided that one year from today you will
What is the relationship between the value of an annuity and discount rates? Suppose you bought a 20-year annuity of $4,700 per year at the current discount rate of 10 percent per year. What happens to the value of your investment if the discount rate suddenly drops to 5 percent? What if the
You’re prepared to make monthly payments of $350, beginning at the end of this month, into an account that pays 10 percent interest compounded monthly. How many payments will you have made when your account balance reaches $40,000?
You want to borrow $88,000 from your local bank to buy a new sailboat. You can afford to make monthly payments of $1,725, but no more. Assuming monthly compounding, what is the highest APR you can afford on a 60-month loan?
You need a 30-year fixed-rate mortgage to buy a new home for $275,000. Your mortgage bank will lend you the money at an APR of 4.8 percent for this 360-month loan. However, you can only afford monthly payments of $1,025, so you offer to pay off any remaining loan balance at the end of the loan in
The present value of the following cash flow stream is $6,700 when discounted at 7.1 percent annually. What is the value of the missing cash flow?Year Cash Flow1 .............................. $1,4002
You won the TVM Lottery. You will receive $1 million today plus another 10 annual payments that increase by $335,000 per year. Thus, in one year you receive $1.335 million. In 2 years, you get $1.67 million, and so on. If the appropriate discount rate is 5.8 percent, what is the present value of
You have purchased a new warehouse. To finance the purchase, you’ve arranged for a 30-year mortgage for 80 percent of the $5,500,000 purchase price. The monthly payment on this loan will be $26,500. What is the APR on this loan? The EAR?
Consider a firm with a contract to sell an asset for $165,000 three years from now. The asset costs $103,000 to produce today. Given a relevant discount rate on this asset of 13 percent per year, will the firm make a profit on this asset? At what rate does the firm break even?
What is the present value of $8,500 per year at a discount rate of 6.7 percent if the first payment is received 6 years from now and the last payment is received 25 years from now?
A 15-year annuity pays $1,940 per month at the end of each month. If the discount rate is 11 percent compounded monthly for the first 7 years and 6 percent compounded monthly thereafter, what is the present value of the annuity?
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