QUESTION 9

CF Estimation. Stanton Inc. is considering the purchase of a new machine which will increase earnings before depreciation and taxes by $6,000 annually. Stanton will use the straightline method to depreciate the machine down to zero, and it expects to sell the machine at the end of its 5-year operating life for $10,000 before taxes. Stantons marginal tax rate is 40%, and it uses 9% cost of capital to evaluate projects of this type. If the net cost of the machine is $40,000, what is the projects NPV? Hint: depreciation is $8,000 per year.

		$12,800
		-$9,650.78
		-$1,200
		None of the above

1 points

QUESTION 10

In relating the Black-Scholes Option Pricing Model to the market value of a firms equity, what is the intrinsic value of the option if the face value of debt is LESS than the firms value?

		Zero
		Firm value debt value
		Debt value firm value
		Negative