Problem 18-18 Projects That Are Not Scale Enhancing

Blue Angel, Inc., a private firm in the holiday gift industry, is considering a new project. The company currently has a target debtequity ratio of .35, but the industry target debtequity ratio is .30. The industry average beta is 1.90. The market risk premium is 7 percent, and the risk-free rate is 5 percent. Assume all companies in this industry can issue debt at the risk-free rate. The corporate tax rate is 34 percent. The project requires an initial outlay of $694,000 and is expected to result in a $114,000 cash inflow at the end of the first year. The project will be financed at Blue Angels target debtequity ratio. Annual cash flows from the project will grow at a constant rate of 5 percent until the end of the fifth year and remain constant forever thereafter.

Calculate the NPV of the project. (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

NPV

Problem 21-14 Lease or Buy

Wolfson Corporation has decided to purchase a new machine that costs $4.5 million. The machine will be depreciated on a straight-line basis and will be worthless after four years. The corporate tax rate is 30 percent. The Sur Bank has offered Wolfson a four-year loan for $4.5 million. The repayment schedule is four yearly principal repayments of $1,125,000 and an interest charge of 7 percent on the outstanding balance of the loan at the beginning of each year. Both principal repayments and interest are due at the end of each year. Cal Leasing Corporation offers to lease the same machine to Wolfson. Lease payments of $1,275,000 per year are due at the beginning of each of the four years of the lease.

a.	What is the NAL of leasing for Wolfson? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

NAL

$

b.	What is the maximum annual lease Wolfson would be willing to pay? (Enter your answer in dollars, not millions of dollars, i.e. 1,234,567. Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Annual lease payment

$

$