1.You are considering the purchase of one of two machines used in your manufacturing plant. Machine A has a life of two years, costs $125 initially, and then $170 per year in maintenance costs. Machine B costs $195 initially, has a life of three years, and requires $145 in annual maintenance costs. Either machine must be replaced at the end of its life with an equivalent machine.

The discount rate is 12 percent and the tax rate is zero. Calculate the EAC. (Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places.)

Which one should you choose?

2.Compute the discounted payback statistic for Project D if the appropriate cost of capital is 12 percent and the maximum allowable discounted payback is four years. (Do not round intermediate calculations and round your final answer to 2 decimal places. If the project does not pay back, then enter a "0" (zero).)

Time: 0 1 2 3 4 5

Cash flow:-$12,400 $3,490 $4,460 $1,800 $0 $1,280

Should the project be accepted or rejected?

3.OMG Inc. has 7 million shares of common stock outstanding, 5 million shares of preferred stock outstanding, and 4,000 bonds. Suppose the common shares sell for $15 per share, the preferred shares sell for $14 per share, and the bonds sell for 109 percent of par.

What weight should you use for preferred stock in the computation of OMG's WACC?

4.FarCryIndustries, a maker of telecommunications equipment, has 3 million shares of common stock outstanding, 1 million shares of preferred stock outstanding, and 10,000 bonds. Suppose the common shares are selling for $27 per share, the preferred shares are selling for $14.50 per share, and the bonds are selling for 98 percent of par.

What would be the weight used for equity in the computation of FarCry's WACC?

5.OMG Inc. has 5 million shares of common stock outstanding, 4 million shares of preferred stock outstanding, and 6,000 bonds. Suppose the common shares are selling for $30 per share, the preferred shares are selling for $29 per share, and the bonds are selling for 109 percent of par.

What weight should you use for debt in the computation of OMG's WACC?

6.Suppose you sell a fixed asset for $110,000 when its book value is $130,000. If your company's marginal tax rate is 35 percent, what will be the effect on cash flows of this sale (i.e., what will be the after-tax cash flow of this sale)?

7.Diddy Corp. stock has a beta of 1.3, the current risk-free rate is 3 percent, and the expected return on the market is 12.50 percent.

What is Diddy's cost of equity?

8.Compute the NPV for Project M if the appropriate cost of capital is 7 percent.

Time: 0 1 2 3 4 5

Cash Flow: -$2,300 $610 $740 $780 $860 $360