Description of this paper

Finance problems

Description

solution


Question

Question;1. The Taylor;Corporation is using a machine that originally cost $66,000. The machine has a book value of $66,000 and a;current market value of $40,000. The asset is in the Class 5 CCA pool which;allows 35% depreciation per year. It will have no salvage value after 5 years;and the company tax rate is 40 percent. Jacqueline Elliott, the Chief Financial;Officer of Taylor, is considering replacing this machine with a newer model;costing $70,000. The new machine will cut;operating costs by $10,000 each year for the next five years. Taylor's cost of capital is 8 percent. Should;the firm replace the asset? (Use NPV methodology to solve this problem).;a.;Prepare a time scale showing the cash;inflows and outflows for the entire period.;b.;What is the total cash out flow in;Year 0?;c.;What would be the PV of the total;cash inflows?;d.;Calculate the PV of CCA Tax Shield;e.;Calculate the NPV of the Project.;f.;Should the company go ahead with the;project or not;2.;The law firm of Bushmaster, Cobra and Asp is;considering investing in a complete small business computer system. The initial investment will be $35,000 and;the hardware, which will be used for 10 years with a salvage value of $5,000;and software of $20,000. In each of;years 3, 5, and 7, $5,000 will be spent for additional software. Hardware has a;CCR rate 45 percent and software is class 12 (100 percent). The computer system;is expected to provide additional revenue of $15,000 per year for the next ten;years and to reduce expenses by $10,000 per year for the same period. The;firm's cost of capital is 12 percent and its tax rate is 40 percent. Based on a;net present value analysis, should this investment be accepted?;a.;Prepare a time scale showing the cash;inflows and outflows for the entire period.;b.;What is the total cash out flow in;Year 0?;c.;What would be the PV of the total;cash inflows?;d.;Calculate the PV of CCA Tax Shield;e.;Calculate the NPV of the Project.;f.;Should the company go ahead with the;project or not;3. Suppose we are;thinking about renovating a leased office. The renovations would cost $310,000.;They would be depreciated on a straight line basis over the six year term of;the lease. The new office would reduce heating and cooling costs by $30,000 per;year. The manager also thinks that employees would be less likely to call in;sick and be more productive. Also the new office would attract more customers.;The combined employee productivity and increased sales is estimated to increase;EBIT by $23,000 annually. The tax rate is 35% and the cost of capital for the;company is 14.5%. Use NPV methodology to determine if the project should go;ahead or not.;a. Prepare a time scale;showing the cash inflows and outflows for the entire period.;b. What is the total cash;out flow in Year 0?;c. What would be the PV of;the total cash inflows?;d. Calculate the PV of CCA;Tax Shield;e.;Calculate the NPV of the Project.;f.;Should the company go ahead with the;project or not?;4.;A new modular paver has been introduced into the;market. The technology is so innovative that it makes all previous pavers;obsolete. Standard Construction had just purchased a new paver last year for;$550,000. It was worth $470,000 on the market, but the new technology paver has;reduced the market value to $55,000 today. If the company keeps the new paver;for 10 years as planned, the salvage value of the paver would be $5,000. The;new excavator costs $650,000 and would increase revenues by $80,000 per year.;The new excavator has a 10 year life and an expected salvage value of $135,000.;The company?s tax rate is 35% and the CCA rate for this type of industrial;machinery is 20%. Depreciation is calculated using the declining balance. The;company expected rate of return is 13%. Should the company get rid of the;current paver and buy the new technology one. Use NPV methodology to determine;what the company should do.;a.;Prepare a time scale showing the cash;inflows and outflows for the entire period.;b.;What is the total cash out flow in;Year 0?;c.;What would be the PV of the total;cash inflows?;d.;Calculate the PV of CCA Tax Shield;e.;Calculate the NPV of the Project.;f.;Should the company go ahead with the;project or not?;5.;Dairy;Corp. has a $15 million bond obligation outstanding which it is considering;refunding. The bonds were issued at;11.5% and the interest rates on similar bonds have declined to 8%. The bonds have twelve years of their 20 year;maturity remaining. Dairy will pay a;call premium of 5% and will incur underwriting costs of $350,000 immediately. There is no underwriting cost consideration;on the old bond. The company is in a 40%;tax bracket. There is no overlap interest period. Should the old issue be;refunded?;6. Top-Down, Inc.;finances its operations maintaining a debt to equity ratio of 0.6. They have;just issued $1,000,000 of 6% bonds that are trading at 101.7. The bond will;mature in 5 years. Brokers are rating Top-Down?s common shares as moderately;risky with a Beta of 1.15, with a market risk premium of 7.75%. Market;conditions are good and interest rates rate have hit historic lows with Canada;Savings bonds currently paying 2.25%. The tax rate for Top Down is 34 percent.;The flotation costs are 3 percent for debt, 6 percent for preferred stock, and;8 percent for common stock. Currently, the firm is considering a small project;that it considers to be equally as risky as the overall firm. The project has;an initial cash outlay of $18,500 and is expected to have a single cash inflow;of $25,000 at the end of year two.;a.;What is the weight of Debt?;b.;What is the weight of Equity?;c.;What is the cost of Debt?;d.;What is the cost of Equity?;e.;Calculate the WACC of Top-Down?;f.;Calculate the weighted average Flotation Costs for Top-Down?;g.;What would be the total amount that Top-Down would have to;raise including flotation costs?;h.;Calculate the NPV for the project?;7.;A&B;Enterprises is trying to select the best investment from among four;alternatives. Each alternative involves;an initial outlay of $87,900. Their cash;flows follow;Year;A;B;C;D;1;$10,000;$50,000;$25,000;$;0;2;20,000;40,000;25,000;0;3;30,000;30,000;25,000;45,000;4;40,000;0;25,000;55,000;5;50,000;0;5,000;60,000;Evaluate and rank;each alternative based on a) payback period, b) net present value (use a 13%;discount rate), and c) internal rate of return.;8. The Intelligent Computing Co. is trying to choose;between two mutually exclusive projects;Year;Cash Flow ?A?;Cash Flow ?B?;0;-49,500;-22,500;1;15,500;7,000;2;15,500;7,000;3;15,500;7,000;4;15,500;7,000;a. If the required return is 10% and the;company applies the profitability index decision rule, which project should the;firm accept?;b. If the company applies the NPV decision;rule, which project should it take?;c. Which decision rule would you choose?;Explain.;9.;You;are considering two mutually exclusive projects with the following cash flows.;Which project(s) should you accept if the discount rate is 7.75 percent? What;if the discount rate is 11 percent?;Year;Project A;Project B;0;-$300,000;-$197,000;1;2000;120,000;2;2000;91,000;3;3000;37,000;4;460,000;0;10. Hartley, Inc. needs to purchase equipment for its 2,000 drive-ins;nationwide. The total cost of the equipment is $2 million. It is estimated that;the after-tax cash inflows from the project will be $210,000 annually in;perpetuity. Hartley has a market value debt-to-assets ratio of 40%. The firm's;cost of equity is 13%, its pre-tax cost of debt is 8%, and the flotation costs;of debt and equity are 2% and 8%, respectively. The tax rate is 34%. Assume the;project is of similar risk to the firm's existing operations.;a.;What is Hartley's weighted;average cost of capital?);b.;Ignoring flotation costs;what is the NPV of the proposed project?;c.;What is the weighted average;flotation cost for Hartley?;d.;What is the dollar flotation;cost for the proposed financing?;e.;After considering flotation;costs, what is the NPV of the proposed project?

 

Paper#50774 | Written in 18-Jul-2015

Price : $32
SiteLock