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1. Find the net present value (NPV) and profi tability index (PI) of a;project that costs $1,500 and returns $800 in year one and $850 in;year two. Assume the project?s cost of capital is 8 percent.;5. For the following projects, compute NPV, IRR, MIRR, PI, and;payback. If these projects are mutually exclusive, which one(s);should be done? If they are independent, which one(s) should be;undertaken?;i. A B C D;Year 0 2 1,000 2 1,500 2 500 2 2,000;Year 1 400 500 100 600;Year 2 400 500 300 800;Year 3 400 700 250 200;Year 4 400 200 200 300;Discount rate 10% 12% 15% 8%;6. The Sanders Electric Company is evaluating two projects for;possible inclusion in the fi rm?s capital budget. Project M will;require a $37,000 investment while project O?s investment will be;$46,000. After-tax cash infl ows are estimated as follows for the two;projects;YEAR PROJECT M PROJECT O;1 $12,000 $10,000;2 12,000 10,000;3 12,000 15,000;4 12,000 15,000;5 15,000;a. Determine the payback period for each project.;b. Calculate the NPV and PI for each project based on a 10;percent cost of capital. Which, if either, of the projects is;acceptable?;c. Determine the IRR and MIRR for Projects M and O.;10. A machine can be purchased for $10,500, including transportation;charges, but installation costs will require $1,500 more. The;machine is expected to last four years and produce annual cash revenues;of $6,000. Annual cash operating expenses are expected to be;$2,000, with depreciation of $3,000 per year. The fi rm has a 30;percent tax rate. Determine the relevant after-tax cash fl ows and;prepare a cash fl ow schedule.;11. Use the information in Problem 10 to do the following;a. Calculate the payback period for the machine.;b. If the project?s cost of capital is 10 percent, would you;recommend buying the machine?;c Estimate the IRR for the machine.;3. Stern?s Stews, Inc., is considering a new capital structure. Its;current and proposed capital structures are the following;CURRENT PROPOSED;Total assets $150 million $150 million;Debt 25 million 100 million;Equity 125 million 50 million;Common stock price $50 $50;Number of shares 2,500,000 1,000,000;Interest rate 12% 12%;Stern?s Stews? president expects next year?s EBIT to be $20 million, but;it may be 25 percent higher or lower. Ignoring taxes, perform an EBIT/;eps analysis. What is the indifference level of earnings before interest;and taxes? Should Stern?s Stews change its capital structure? Why?;7. Here are the income statements for Genatron Manufacturing;Corporation for 2013 and 2014;INCOME STATEMENT 2013 2014;Net sales $1,300,000 $1,500,000;Cost of goods sold 780,000 900,000;Gross profi t $520,000 $600,000;General and administrative 150,000 150,000;Marketing expenses 130,000 150,000;Depreciation 40,000 53,000;Interest 45,000 57,000;Earnings before taxes $155,000 $190,000;Income taxes 62,000 76,000;Net income $93,000 $114,000;Assuming one-half of the general and administrative expenses are fi xed;costs, estimate Genatron?s DOL, DFL, and DCL in 2013 and 2014.;8. The Nutrex Corporation wants to calculate its weighted average;cost of capital (WACC). Its target capital structure weights are 40;percent long-term debt and 60 percent common equity. The beforetax;cost of debt is estimated to be 10 percent and the company is in;the 40 percent tax bracket. The current risk-free interest rate is 8;percent on Treasury bills. The expected return on the market is 13;percent and the fi rm?s stock beta is 1.8.;a. What is Nutrex?s cost of debt?;b. Estimate Nutrex?s expected return on common equity using;the security market line (SML).;c. Calculate the after-tax weighted average cost of capital (WACC).;9. The following are balance sheets for the Genatron Manufacturing;Corporation for the years 2013 and 2014;BALANCE SHEET 2013 2014;Cash $50,000 $40,000;Accounts receivable 200,000 260,000;Inventory 450,000 500,000;Total current assets 700,000 800,000;Fixed assets (net) 300,000 400,000;Total assets $1,000,000 $1,200,000;Bank loan, 10% $90,000 $ 90,000;Accounts payable 130,000 170,000;Accruals 50,000 70,000;Total current liabilities $270,000 $330,000;Long-term debt, 12% 300,000 400,000;Common stock, $10 par 300,000 300,000;Capital surplus 50,000 50,000;Retained earnings 80,000 120,000;Total liabilities and equity $1,000,000 $1,200,000


Paper#35455 | Written in 18-Jul-2015

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