1). Briarcrest Condiments is a spice-making firm. Recently, it developed a new process for producing spices. The process requires new machinery that would cost $1,776,329. have a life of five years, and would produce the cash flows shown in the following table.
| Year | Cash Flow |
|---|---|
| 1 | $613,201 |
| 2 | -225,580 |
| 3 | 1,015,102 |
| 4 | 1,011,437 |
| 5 | 844,196 |
What is the NPV if the discount rate is 15.69 percent? (Enter negative amounts using negative sign e.g. -45.25. Round answer to 2 decimal places, e.g. 15.25.)
2). Archer Daniels Midland Company is considering buying a new farm that it plans to operate for 10 years. The farm will require an initial investment of $12.10 million. This investment will consist of $2.60 million for land and $9.50 million for trucks and other equipment. The land, all trucks, and all other equipment is expected to be sold at the end of 10 years at a price of $5.15 million, $2.11 million above book value. The farm is expected to produce revenue of $2.05 million each year, and annual cash flow from operations equals $1.91 million. The marginal tax rate is 35 percent, and the appropriate discount rate is 9 percent. Calculate the NPV of this investment. (Round intermediate calculations and final answer to 2 decimal places, e.g. 15.25.)
The project should be: Accepted or Rejected.
3). Bell Mountain Vineyards is considering updating its current manual accounting system with a high-end electronic system. While the new accounting system would save the company money, the cost of the system continues to decline. The Bell Mountain s opportunity cost of capital is 10.4 percent, and the costs and values of investments made at different times in the future are as follows:
| Year | Cost | Value of Future Savings (at time of purchase) |
|
|---|---|---|---|
| 0 | $5,000 | $7,000 | |
| 1 | 4,250 | 7,000 | |
| 2 | 3,500 | 7,000 | |
| 3 | 2,750 | 7,000 | |
| 4 | 2,000 | 7,000 | |
| 5 | 1,250 | 7,000 | |
Calculate the NPV of each choice. (Round answers to the nearest whole dollar, e.g. 5,275.)
The NPV of each choice is:
NPV0 = $
NPV1 = $
NPV2 = $
NPV3 = $
NPV4 = $
NPV5 = $
Suggest when should Bell Mountain buy the new accounting system?
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4). |
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Chip s Home Brew Whiskey management forecasts that if the firm sells each bottle of Snake-Bite for $20, then the demand for the product will be 15,000 bottles per year, whereas sales will be 92 percent as high if the price is raised 12 percent. Chip s variable cost per bottle is $10, and the total fixed cash cost for the year is $100,000. Depreciation and amortization charges are $20,000, and the firm has a 30 percent marginal tax rate. Management anticipates an increased working capital need of $3,000 for the year. What will be the effect of the price increase on the firm s FCF for the year? |
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(Round answers to nearest whole dollar, e.g. 5,275.) |
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$ |
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5).Capital Co. has a capital structure, based on current market values, that consists of 48 percent debt, 11 percent preferred stock, and 41 percent common stock. If the returns required by investors are 9 percent, 12 percent, and 17 percent for the debt, preferred stock, and common stock, respectively, what is Capital s after-tax WACC? Assume that the firm s marginal tax rate is 40 percent.(Round intermediate calculations to 4 decimal places, e.g. 1.2514 and final answer to 2 decimal places, e.g. 15.25%.)
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