1.You are offered Birr 1,000 today, Birr 10,000 in 12 years, or Birr 25,000 in 25 years. Assuming that you can earn 11 percent on your money, which offer should you choose?

2. You now have Birr 2,000,000 in the bank earning interest of .5 percent per month. You need Birr 3,000,000 to make a down payment on a house. You can save an additional Birr 10,000 per month. How long will it take me to accumulate the Birr 3,000,000?

3. You have Birr 1,500 to invest today at 7% interest compounded annually. Find how much you will have accumulated in the account at the end of (1) 3 years, (2) 6 years, and (3) 9 years.

4. What single investment made today, earning 12% annual interest, will be worth Birr 6,000 at the end of 6 years?

5.Herky Foods is considering acquisition of a new wrapping machine. The initial investment is estimated at $1.25 million, and the machine will have a 5-year life with no salvage value. Using a 6% discount rate, determine the net present value (NPV) of the machine given its expected operating cash inflows shown in the following table. Based on the project’s NPV, should Herky make this investment?

Year	Birr
1	400,000
2	375,000
3	300,000
4	350,000
5	200,000

Q.6.Shell Camping Gear, Inc., is considering two mutually exclusive projects. Each requires an initial investment of $100,000. John Shell, president of the company, has set a maximum payback period of 4 years. The after-tax cash inflows associated with each project are shown in the following table:

	Cash inflows (CFt)
Year	Project A (in Birr)	Project B (in Birr)
1	10,000	40,000
2	20,000	30,000
3	30,000	20,000
4	40,000	10,000
5	20,000	20,000

Required: Determine the payback period of each project. Which project should be accepted?

Q.7. Hook Industries is considering the replacement of one of its old drill presses. Three alternative replacement presses are under consideration. The relevant cash flows associated with each are shown in the following table. The firm’s cost of capital is 15%.

	Press A (in Birr)	Press B (in Birr)	Press C (in Birr)
Initial investment (CF0)	85,000	60,000	130,000
Year	Cash inflows (CFt)
1	18,000	12,000	50,000
2	18,000	14,000	30,000
3	18,000	16,000	20,000
4	18,000	18,000	20,000
5	18,000	20,000	20,000
6	18,000	25,000	30,000
7	18,000	-	40,000
8	18,000	-	50,000

Required:

Calculate the net present value (NPV) of each press and evaluate the acceptability of each press.

Rank the presses from best to worst using NPV.

Calculate the profitability index (PI) for each press and rank the presses from best to worst using PI.

Medallion Cooling Systems, Inc., has total assets of $10,000,000, EBIT of $2,000,000, and preferred dividends of $200,000 and is taxed at a rate of 40%. In an effort to determine the optimal capital structure, the firm has assembled data on the cost of debt, the number of shares of common stock for various levels of indebtedness, and the overall required return on investment:

Capital structure Weight of Debt	Cost of debt, rd	Number of common stock shares	Required return, rs
0%	0%	200,000	12%
15	8	170,000	13
30	9	140,000	14
45	12	110,000	16
60	15	80,000	20

Required: Choose the optimal capital structure. Justify your choice.

Q.9. Longstreet Communications Inc. (LCI) has the following capital structure, which it considers to be optimal: debt = 25%, preferred stock = 15%, and common stock = 60%. LCI’s tax rate is 40%, and investors expect earnings and dividends to grow at a constant rate of 6% in the future. LCI paid a dividend of $3.70 per share last year (D0), and its stock currently sells at a price of $60 per share. Ten-year Treasury bonds yield 6%, the market risk premium is 5%, and LCI’s beta is 1.3. The following terms would apply to new security offerings.

Preferred: New preferred could be sold to the public at a price of $100 per share, with dividend of $9. Flotation costs of $5 per share would be incurred.

Debt: Debt could be sold at an interest rate of 9%.

Common: New common equity will be raised only by retaining earnings.

Required:

 Find the component costs of debt, preferred stock, and common stock.

What is the WACC?

Calculate the after-tax cost of debt at interest rate of 13% and tax rate of 20%

Q.10.Alexis Company uses 800 units of a product per year on a continuous basis. The product has a fixed cost of $50 per order, and its carrying cost is $2 per unit per year. It takes 5 days to receive a shipment after an order is placed, and the firm wishes to hold 10 days’ usage in inventory as a safety stock.

Calculate the EOQ.

Determine the average level of inventory. (Note: Use a 365-day year to calculate daily usage.)

Determine the reorder point.

Indicate which of the following variables change if the firm does not hold the safety stock: (1) order cost, (2) carrying cost, (3) total inventory cost, (4) reorder point, (5) economic order quantity. Explain.

Q.11. Joanna Browne is considering either leasing or purchasing a new Chrysler Sebring convertible that has a manufacturer’s suggested retail price (MSRP) of $33,000. The dealership offers a 3-year lease that requires a capital payment of $3,300 ($3,000 down payment + $300 security deposit) and monthly payments of $494. Purchasing requires a $2,640 down payment, sales tax of 6.5% ($2,145), and 36 monthly payments of $784. Joanna estimates the value of the car will be $17,000 at the end of 3 years. She can earn 5% annual interest on her savings and is subject to a 6.5% sales tax on purchases. Make a reasonable recommendation to Joanna using a lease-versus-purchase analysis that, for simplicity, ignores the time value of money.

Calculate the total cost of leasing.

 Calculate the total cost of purchasing.

Which should Joanna do?

Answer rating: 100% (QA)

Solution You should choose Birr 10000 in 12 years This is because the present value of Birr 10000 in 12 years discounted at 11 is Birr 557995 This mea... View the full answer