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PDF Corp. needs to replace an old lathe with a new, more efficient model. The old lathe was purchased for $50,000

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Question;PDF Corp. needs to replace an old lathe with a new, more;efficient model. The old lathe was purchased for $50,000 nine years ago and has;a current book value of $5,000. (The old machine is being depreciated on a;straight-line basis over a ten-year useful life.) The new lathe costs $100,000.;It will cost the company $10,000 to get the new lathe to the factory and get it;installed. The old machine will be sold as scrap metal for $2,000. The new;machine is also being depreciated on a straight-line basis over ten years.;Sales are expected to increase by $8,000 per year while operating expenses are;expected to decrease by $12,000 per year. PDF's marginal tax rate is 40%.;Additional working capital of $3,000 is required to maintain the new machine;and higher sales level. The new lathe is expected to be sold for $5,000 at the;end of the project's ten-year life. What is the incremental free cash flow;during year 1 of the project?;Answer;a.;$12,800;b.;$14,400;c.;$11,400;d.;$15,200;Free cash flows represent the benefits generated from;accepting a capital-budgeting proposal.;Answer;a.;True;b.;False;Project C requires a net investment of $1,000,000 and has a;payback period of 5.6 years. You analyze Project C and decide that Year 1 free;cash flow is $100,000 too low, and Year 3 free cash flow is $100,000 too high.;After making the necessary adjustments;Answer;a.;the payback period for Project C will be longer than 5.6;years.;b.;the payback period for Project C will be shorter than 5.6;years.;c.;the IRR of Project C will increase.;d.;the NPV of Project C will decrease.;Jiffy Co. expects to pay a dividend of $2.00 per share in;one year. The current price of Jiffy common stock is $20 per share. Flotation;costs are $1.00 per share when Jiffy issues new stock. What is the cost of;internal common equity (retained earnings) if the long-term growth in dividends;is projected to be 6 percent indefinitely?;Answer;a.;10.60 percent;b.;16.00 percent;c.;16.53 percent;d.;16.60 percent;Zellars, Inc. is considering two mutually exclusive;projects, A and B. Project A costs $75,000 and is expected to generate $48,000;in year one and $45,000 in year two. Project B costs $80,000 and is expected to;generate $34,000 in year one, $37,000 in year two, $26,000 in year three, and;$25,000 in year four. Zellars, Inc.'s required rate of return for these;projects is 10%. The profitability index for Project A is;Answer;a.;1.47.;b.;1.22.;c.;1.13.;d.;1.08.;A company has preferred stock with a current market price of;$18 per share. The preferred stock pays an annual dividend of 4% based on a par;value of $100. Flotation costs associated with the sale of preferred stock;equal $1.50 per share. The company's marginal tax rate is 40%. Therefore, the;cost of preferred stock is;Answer;a.;28.80%.;b.;24.24%.;c.;22.22%.;d.;14.55%.;Which of the following should be included in the initial;outlay?;Answer;a.;taxable gain on the sale of old equipment being replaced;b.;first year depreciation expense on any new equipment;purchased;c.;preexisting firm overhead reallocated to the new project;d.;increased investment in inventory and accounts receivable;If depreciation expense in year one of a project increases;for a highly profitable company;Answer;a.;net income decreases and incremental free cash flow;decreases.;b.;net income increases and incremental free cash flow;increases.;c.;the book value of the depreciating asset increases at the;end of year one.;d.;net income decreases and incremental free cash flow;increases.

 

Paper#50301 | Written in 18-Jul-2015

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