1. Texas Tires is considering replacing an old machine with a new, more efficient, one. The new machine will cost $1.2 million. The old machine originally cost $714,000 4 years ago and was being depreciated straight line over a 7 year life. The old machine can now be sold for $325,000. The firm has a 30 % tax rate. Calculate the initial outlay on the new machine.

2. BBC is looking to acquire ZZP Co. This investment will cost $2.3 million and is expected to give BBC returns of $680,000 yearly for the next 11 years. ZZP has a beta of 2.1. The current Treasury bond rate is 3.7% while the stock market return is 14.9%.

Calculate the risk-adjusted discount rate for ZZP and the risk-adjusted NPV. Should BBC acquire ZZP? State your reasons. (Go out 4 decimal places in your calculations)

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