675 words - 3 pages

Problem 10.14

Briarcrest Condiments is a spice-making firm. Recently, it developed a new process for producing spices. The process requires new machinery that would cost $2,011,756. have a life of five years, and would produce the cash flows shown in the following table.

Year Cash Flow

1 $569,998

2 -211,846

3 883,551

4 797,704

5 737,014

What is the NPV if the discount rate is 12.65 percent? (Enter negative amounts using negative sign e.g. -45.25. Round answer to 2 decimal places, e.g. 15.25.)

-153004.09

Problem 11.20

Archer Daniels Midland Company is considering buying a new farm that it plans to operate for 10 years. The farm will require an initial investment of $12.20 million. This investment will consist of $2.20 million for land and $10.00 million for trucks and other equipment. The land, all trucks, and all other equipment is expected to be sold at the end of 10 years at a ...view middle of the document...

While the new accounting system would save the company money, the cost of the system continues to decline. The Bell Mountain’s opportunity cost of capital is 17.7 percent, and the costs and values of investments made at different times in the future are as follows:

Year Cost Value of Future Savings

(at time of purchase)

0 $5,000 $7,000

1 4,200 7,000

2 3,400 7,000

3 2,600 7,000

4 1,800 7,000

5 1,000 7,000

Calculate the NPV of each choice. (Round answers to the nearest whole dollar, e.g. 5,275.)

The NPV of each choice is:

NPV0 = $ 2000

NPV1 = $ 1747

NPV2 = $ 1653

NPV3 = $ 1693

NPV4 = $ 1847

NPV5 = $ 2099

Suggest when should Bell Mountain buy the new accounting system?

Bell Mountain should purchase the system in .

1 year

2 years

3 Years

4 Years

5 Years

Problem 12.24

Chip’s Home Brew Whiskey management forecasts that if the firm sells each bottle of Snake-Bite for $20, then the demand for the product will be 15,000 bottles per year, whereas sales will be 93 percent as high if the price is raised 8 percent. Chip’s variable cost per bottle is $10, and the total fixed cash cost for the year is $100,000. Depreciation and amortization charges are $20,000, and the firm has a 30 percent marginal tax rate. Management anticipates an increased working capital need of $3,000 for the year. What will be the effect of the price increase on the firm’s FCF for the year? (Round answers to nearest whole dollar, e.g. 5,275.)

At $20 per bottle the Chip’s FCF is $ and at the new price Chip’s FCF is $ .

38000

46274

Problem 13.11

Capital Co. has a capital structure, based on current market values, that consists of 30 percent debt, 11 percent preferred stock, and 59 percent common stock. If the returns required by investors are 10 percent, 10 percent, and 17 percent for the debt, preferred stock, and common stock, respectively, what is Capital’s after-tax WACC? Assume that the firm’s marginal tax rate is 40 percent. (Round intermediate calculations to 4 decimal places, e.g. 1.2514 and final answer to 2 decimal places, e.g. 15.25%.)

After tax WACC = %

12.93

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