1. You are trying to decide between two data plans. Carrier A required you to pay $200 for the equipment and monthly charges of $60 for 24 months. Carrier B wants you to pay $100 for the equipment and monthly charges of $70 for 12 months. Assume you will keep replacing the equipment and service after your contract expires. Your cost of capital is 4% APR. Based on cost alone, which carrier should you choose?

2. You own a car rental company, and you have two options to replace your fleet. For each car, you can either enter into a five-year lease for $7,000 per year (pre- tax) or you can purchase the car for $30,000. You believe the cars will last for 8 years and be worth $4,000 at the end of the 8 years. The lease payments cover maintenance costs, but if you buy the cars, you will pay $1,200 per year (pre-tax) for a maintenance contract on each car and depreciate the cars straight line over eight years. You can then sell the cars at the end of the eighth year. Your required return on this investment is 12% and the firms tax rate is 21%. Assume all cash flows occur at the end of the year. What is the EAA of the purchase option, and should you lease or purchase the cars?

3. Kayler Construction Co. must choose between two sources of heavy-duty drilling equipment. Drill A costs $7,500 and will be depreciated straight line over its five year life. The (pre-tax) maintenance costs for Drill A are $150 per year. In contrast, Drill B costs $9,000 and will be depreciated straight line over its seven- year life. The (pre-tax) maintenance costs for Drill B are $120 per year. You should assume that Kayler must have this type of drilling equipment to stay in business, so whichever drill they buy, they will replace it when it wears out. Each drill will have zero salvage value at the end of its useful life. The required rate of return for Kayler Construction is 8.5 percent and the tax rate is 21%. Which drill should Kayler purchase and WHY?

4. Thor Industries is bidding on a contract for a 2-year investment project. The customer requires you to produce 500,000 widgets per year and the operating costs to produce that quantity of widgets is $3.25 million per year. The project will require an initial investment of $250 million for equipment that will be depreciated straight-line to zero over the two-year life. The equipment is expected to be scrapped for $10 million at the end of the project. The project will also require a $62.5 million initial investment in working capital. The firms marginal tax rate is 35% and their required rate of return on investments of similar risk is 12%. What minimum price should they bid per unit in order to earn their required return if they win the contract?

5. You want to submit a bid to supply 250,000 cartons of widgets per year over the next 6 years. The variable cost per carton is $6 and the total fixed costs are $175,000 per year. Both fixed and variable costs are expected to increase at an inflation rate of 1.5% per year. The initial cost of equipment is $425,000; this cost will be depreciated on a five-year MACRS schedule. The estimated salvage value is $50,000 at the end of the sixth year. The project will require an initial investment of $50,000 in inventory and accounts receivable. Your marginal tax rate is 21 percent and your required return on this project is 18 percent. Use Excels Goal Seek function to determine the minimum price should you charge for each carton of widgets.