Question $1($Total $60$ marks$)$

Degnan Dance Company, Inc., a manufacturer of dance and exercise apparel, is considering replacing

an existing piece of equipment with a more sophisticated machine. The following information is given.

FIGURE $1$

Facts

Earnings Before Depreciation and Taxes

The firm pays $40$ percent taxes on ordinary income and capital gains.

a$)$ Given the information in Figure $1,$ compute the initial investment.

$(10$ marks$)$

b$)$ Given the information in Figure $1,$ compute the incremental annual cash flows.

$(20$ marks$)$

c$)$ Given the information in Figure $1,$ compute the payback period.

$(15$ marks$)$

d$)$ Given the information in Figure $1$ and $15$ percent cost of capital,

i$.$ compute the net present value.

$(10$ marks$)$

ii$.$ Should the project be accepted?

$(5$ marks$)$ Question $2($Total $20$ marks$)$

Galaxy Satellite Co$.$ is attempting to select the best group of independent projects competing for the

firm's fixed capital budget of $$10,000,000.$ Any unused portion of this budget will earn less than its $20$

percent cost of capital. A summary of key data about the proposed projects follows.

FIGURE $2$

a$)$ Use the NPV approach to select the best group of projects. $($See Figure $2.)$

$(5$ marks$)$

b$)$ Use the IRR approach to select the best group of projects. $($See Figure $2.)$

$(10$ marks$)$

c$)$ Which projects should the firm implement? $($See Figure $2.)$

$(5$ marks$)$