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##### Accounting Problems from chapters 17 and 18

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solution

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Question;1. Find the net present value (NPV) and profitability 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 DYear 0 2 1,000 2 1,500 2 500 2 2,000Year 1 400 500 100 600Year 2 400 500 300 800Year 3 400 700 250 200Year 4 400 200 200 300Discount 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 O1 $12,000 $10,0002 12,000 10,0003 12,000 15,0004 12,000 15,0005 15,000a. 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 andprepare 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 PROPOSEDTotal assets $150 million $150 millionDebt 25 million 100 millionEquity 125 million 50 millionCommon stock price $50 $50Number of shares 2,500,000 1,000,000Interest 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 2014Net sales $1,300,000 $1,500,000Cost of goods sold 780,000 900,000Gross profi t $520,000 $600,000General and administrative 150,000 150,000Marketing expenses 130,000 150,000Depreciation 40,000 53,000Interest 45,000 57,000Earnings before taxes $155,000 $190,000Income taxes 62,000 76,000Net income $93,000 $114,000Assuming one-half of the general and administrative expenses are fixed 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 beforetaxcost 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 13percent 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 2014Cash $50,000 $40,000Accounts receivable 200,000 260,000Inventory 450,000 500,000Total current assets 700,000 800,000Fixed assets (net) 300,000 400,000Total assets $1,000,000 $1,200,000Bank loan, 10% $90,000 $ 90,000Accounts payable 130,000 170,000Accruals 50,000 70,000Total current liabilities $270,000 $330,000Long-term debt, 12% 300,000 400,000Common stock, $10 par 300,000 300,000Capital surplus 50,000 50,000Retained earnings 80,000 120,000Total liabilities and equity $1,000,000 $1,200,000

Paper#41486 | Written in 18-Jul-2015

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