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Jen and Barry?s Ice Cream Shoppe is considering the purchase of a new mixing machine.




Jen and Barry?s Ice Cream Shoppe is considering the purchase of a new mixing machine. The new machine would be an expansion project (it would not replace any current machine) and it would cost $6,000. It has an estimated useful life of 5 years, and would be depreciated on a straight-line 5 year schedule. At the end of its useful life it will be sold (scrapped) for $0 salvage value. The machine would produce a net operating income (revenue minus expenses), not including taxes or depreciation, of $3,500 per year for its useful life. There is a one time installation cost of $2,500 that must be borne when the machine is purchased. There are no working capital (inventory or receivables) affects associated with the project. The firm's marginal tax rate is 40%. J&B's has a debt ratio of 40%, which matches their target capital structure.;Debit ratio= total assets -total equity = 40%;Total assets;Jen and Barry?s stock trades on the NYSE. Standard and Poor?s lists their company beta as 1.2.10-year US Bonds are yielding 5%, and the return on the market is expected to be 12%. J&B Bonds with a 12-year maturity are trading at $1,100 with a coupon rate of 7% and semi-annual coupon payments.;Given the above information, calculate (1) J&B?s after-tax cost of debt, (b) J&B?s cost of equity capital, (c) J&B?s Weighted Average Cost of Capital (WACC). Then, assume that the J&B WACC is 24% (it?s not) and calculate the (4) NPV and (5) IRR for the proposed purchase, and (6) indicate whether Jen and Barry should proceed with the purchase and why or why not. (SHOW ALL YOUR WORK. CALCULATE IRR AS A PERCENTAGE TO AT LEAST 2 DECIMAL PLACES. CIRCLE YOUR ANSWERS).;Additional Requirements;Min Pages: 1;Level of Detail: Show all work


Paper#21506 | Written in 18-Jul-2015

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