ABC Inc. is evaluating a 12-year task. The task requires a tool that costs $125,000 and...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
ABC Inc. is evaluating a 12-year task. The task requires a tool that costs $125,000 and has a CCA rate of 25%. The tool is the only asset in the asset class and its salvage value is $8,000 at year 12. The task generates $42,500 annual before-tax cash flow for 12 years. The cost of debt is 6% and the tax rate is 30%. a) Assume DIY's WACC is 10%, calculate the NPV using the WACC method. b) Assume DIY borrows $35,000 to finance the task and the cost of equity is 12.5%, calculate the NPV using the FTE method. c) Assume the flotation cost is 3% of the amount borrowed and DIY needs $35,000 (net of flotation cost) to finance the task. If the cost of unlevered equity is 10.5%, calculate the NPV using the APV method. ABC Inc. is evaluating a 12-year task. The task requires a tool that costs $125,000 and has a CCA rate of 25%. The tool is the only asset in the asset class and its salvage value is $8,000 at year 12. The task generates $42,500 annual before-tax cash flow for 12 years. The cost of debt is 6% and the tax rate is 30%. a) Assume DIY's WACC is 10%, calculate the NPV using the WACC method. b) Assume DIY borrows $35,000 to finance the task and the cost of equity is 12.5%, calculate the NPV using the FTE method. c) Assume the flotation cost is 3% of the amount borrowed and DIY needs $35,000 (net of flotation cost) to finance the task. If the cost of unlevered equity is 10.5%, calculate the NPV using the APV method.
Expert Answer:
Answer rating: 100% (QA)
a To calculate the NPV using the WACC method we need to discount the cash flows at the weighted aver... View the full answer
Related Book For
Fundamentals of Corporate Finance
ISBN: 978-0071051606
8th Canadian Edition
Authors: Stephen A. Ross, Randolph W. Westerfield
Posted Date:
Students also viewed these accounting questions
-
The following additional information is available for the Dr. Ivan and Irene Incisor family from Chapters 1-5. Ivan's grandfather died and left a portfolio of municipal bonds. In 2012, they pay Ivan...
-
Write a project management plan. we have a template and project description. we need to edit the template(table of contents) with our own ideas. CPSC 8820-01 Project Management Plan Your Unique...
-
The following additional information is available for the Dr. Ivan and Irene Incisor family from Chapters 1-6. On December 12, Irene purchased the building where her store is located. She paid...
-
Cooper Movie Studio Corp. makes movies and is interested in lowering its operating costs for the following year, while maintaining the high quality and appeal of its movies. Cooper's management is...
-
Sebolt Wire Company heats copper ingots to very high temperatures by placing the ingots in a large heat coil. The heated ingots are then run through a shaping machine that shapes the soft ingot into...
-
In Exercises 2536, find the limit (if it exists). If the limit does not exist, explain why. 1 lim (x, y) (0,0) xy 2
-
In July 2008, Brian, Dale, and Sandra Allen signed a contract with East Resources, Inc., concerning 148 acres of the Allens property. East wanted to develop and exploit the oil and gas resources...
-
Comparing Income with Cash Flow (A Challenging Problem) Huang Trucking Company was organized on January 1, 2011. At the end of the first quarter (three months) of operations, the owner prepared a...
-
What are the key components of a relational database management system? Why are relational database management systems different from database models that preceded the relational model?
-
The rod OB slides through the collar pivoted to the rotating link at A. If CA has an angular velocity = 3 rad/s for an interval of motion, calculate the angular velocity of OB when = 45. CA = 200...
-
Day fines are fines that are based on a sliding scale. The amount of money a person actually pays for an offense is based on their income. The term day fine refers to a fine that is equivalent to a...
-
Each of the following bond has contractual cash flows that meet the SPPI (solely payments of principal and interest) test. Determine the business model. (a) The entity invests surplus cash in short...
-
Describe, in your own words, the methodology of deferred tax accounting.
-
Go to the St. Louis Federal Reserve FRED database, and find data on potential output (GDPPOT), real GDP (GDPC1), a measure of the price level, the personal consumption expenditure price index...
-
How is a swap similar to a forward contract?
-
Explain the rationale for reporting diluted earnings per share.
-
? solve graphically the LPP minimize Z=215x Subject to the constraints 2 +22 21, 100% 10% 22% 10x + 100x 210, x120, X >0.
-
Chris Zulliger was a chef at the Plaza Restaurant in the Snowbird Ski Resort in Utah. The restaurant is located at the base of a mountain. As a chef for the Plaza, Zulliger was instructed by his...
-
Tempest Manufacturing has 8 million shares of common stock outstanding. The current share price is $73, and the book value per share is $7. Tempest Manufacturing also has two bond issues outstanding....
-
You have $10,000 to invest in a stock portfolio. Your choices are Stock X with an expected return of 12 percent and Stock Y with an expected return of 9.5 percent. If your goal is to create a...
-
In the previous problem, suppose you think it is likely that expected sales will be revised upwards to 9500 units if the first year is a success and revised downwards to 4300 units if the first year...
-
In the past five years, there have been significant innovations in technology such as smartphones and tablets. Technology companies rely on intellectual property (IP) rights, such as patents,...
-
Respondents Varsity Brands, Inc., Varsity Spirit Corporation, and Varsity Spirit Fashions & Supplies, Inc., design, make, and sell cheerleading uniforms. Respondents have obtained or acquired more...
-
Mr. Tam is the front man for the Asian American dance-rock band The Slants. Mr. Tam named his band The Slants to reclaim and take ownership of Asian stereotypes. The band draws inspiration for its...
Study smarter with the SolutionInn App