1. Ilana Industries Inc. needs a new lathe. It can buy a new high-speed lathe for $1 million. The lathe will cost $35,000 per year to run, but it will save the firm $125,000 in labor costs and will be useful for 10 years. Suppose that for tax purposes, the lather will be depreciated on a straight line basis over its 10-year life to a salvage value of $100,000. The actual market value of the lathe at the time will also be about $100,000. The discount rate is 8%, and the corporate tax rate is 35%. What is the NPV of buying the new lathe?

3. The most likely outcomes for a particular project are estimated as follows: Unit Price: $50 Variable Cost: $30 Fixed Cost: $300,000 Expected Sales: 30,000 units/year However, you recognize that some of these estimates are subject to error. Suppose that each variable may turn out to be either 10% higher or 10 lower than the original estimate. The project will last for 10 years and requires an initial investment of $1 million, which will be depreciated straight-line over the project life to a final value of zero. The firms tax rate is 35%, and the required rate of return is 12%. What is the projects NPV in the most likely scenario? What is the projects NPV in the best-case scenario? What is the projects NPV in the worse-case scenario? If the probability of the three scenarios above are 20%, 60%, and 20%, what is the expected NPV of the project? Would you accept it given this estimate?

4. Dime a Dozen Diamonds makes synthetic diamonds by treating carbon. Each diamond can be sold for $100. The material cost for a standard diamond is $40. The fixed costs incurred each year for factory upkeep and administrative expenses are $200,000. The machinery costs $1 million and is depreciated straight-line over 10 years to a salvage value of zero. What is the accounting break-even level of annual sales in terms of number of diamonds sold? What is the NPV break-even level of sales assuming a tax rate of 35%, a 10-year project life and a discount rate of 12%?

5. You estimate that your cattle farm will generate $1 million of profits on sales of $4 million under normal economic conditions. The degree of operating leverage of your farm is 8. What will your profits be if sales turn out to be $3.5 million? What will your profits be if sales turn out to be $4.5 million?

6. A stock is selling today for $40 a share. At the end of the year, it pays a dividend of $2 per share and sells for $44. What is the total rate of return on the stock for the year? What are its dividend yield and percentage capital gain? Now suppose the year-end stock price after the dividend is paid is $36. What are the dividend yield and percentage capital gain in this case? Why is the dividend yield the same in parts b) and c)?