Question
1. Data for all Milton Industries problems are the same. Milton Industries wants to purchase new equipment that has a quoted price of $1,000,000. Milton
1. Data for all Milton Industries problems are the same. Milton Industries wants to purchase new equipment that has a quoted price of $1,000,000. Milton estimates an additional cost of $75,000 will be needed today to have the equipment modified, shipped, and installed. The purchase of this additional equipment will require Milton to invest an estimated $85,000 in networking capital upfront, and this investment should be recovered when Milton sells the equipment. If purchased, the equipment will be employed for a total of six years, and then sold for an estimated $780,000. The equipment will be depreciated straight-line on a six-year schedule. During each of the years that the equipment is in service, it is expected to boost Miltons sales revenue by $398,000 through annual operating costs (other than depreciation) are also expected to be higher, to the extent of $94,000. Milton faces a marginal tax rate of 35%, and its cost of capital is 10.5%.
The IRR of this project is:
a. 17.14%
b. 15.87%
c. 10.55%
d. 14.84%
e. 13.15%
2. Petrus Corp finances itself with 5% preferred equity, 60% common equity, and the remainder from debt. Its pre-tax cost of debt is estimated to be 8%, its marginal cost of preferred equity is estimated to be 10%, and its marginal cost of common equity is estimated to be 12%. Its marginal tax rate is 40%. Based on this information, Petruss weighted average cost of capital is estimated to be:
a. 9.20%
b. 8.85%
c. 9.38%
d. 8.90%
e. 9.96%
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