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( 2 3 ) TexMex Food Company is considering a new salsa whose data are shown below. Under the new tax law, the equipment to

(23)TexMex Food Company is considering a new salsa whose data are shown below. Under the new tax law, the equipment to be used in the project is eligible for 100% bonus depreciation, so it will be fully depreciated at t =0. At the end of the projects life, the equipment would have zero salvage value, and no change in net operating working capital (NOWC) would be required for the project. Revenues and operating costs are expected to be constant over the project's 3-year life. However, this project would compete with other TexMex products and would reduce their pre-tax annual cash flows. What is the project's NPV?(Hint: Cash flows are constant in Years 1-3.) Do not round the intermediate calculations and round the final answer to the nearest whole number.
WACC 10.0%
Pre-tax cash flow reduction for other products (cannibalization) $5,000
Equipment cost $140,000
Annual sales revenues $66,000
Annual operating costs $25,000
Tax rate 25.0%
a.-$31,140
b.-$37,855
c.-$72,855
d.-$16,095
e.-$28,310
(24)Temple Corp. is considering a new project whose data are shown below. The equipment that would be used has a 3-year tax life. Under the new tax law, the equipment used in the project is eligible for 100% bonus depreciation, so it will be fully depreciated at t =0. The equipment would have a zero salvage value at the end of the projects life. No change in net operating working capital (NOWC) would be required. Revenues and operating costs are expected to be constant over the project's 3-year life. What is the project's NPV? Do not round the intermediate calculations and round the final answer to the nearest whole number.
Risk-adjusted WACC 10.0%
Equipment cost $61,000
Sales revenues, each year $52,500
Annual operating costs $23,300
Tax rate 25.0%
a. $6,104
b. $12,871
c. $11,616
d. $8,712
e. $14,158
(25)Assume that you have been hired as a consultant by CGT, a major producer of chemicals and plastics, including plastic grocery bags, styrofoam cups, and fertilizers, to estimate the firm's weighted average cost of capital. The balance sheet and some other information are provided below.
Assets
Current assets $38,000,000
Net plant, property, and equipment $101,000,000
Total assets $139,000,000
Liabilities and Equity
Accounts payable $10,000,000
Accruals $9,000,000
Current liabilities $19,000,000
Long-term debt (40,000 bonds, $1,000 par value) $40,000,000
Total liabilities $59,000,000
Common stock (10,000,000 shares) $30,000,000
Retained earnings $50,000,000
Total shareholders' equity $80,000,000
Total liabilities and shareholders' equity $139,000,000
The stock is currently selling for $28.90 per share, and its noncallable $1,000.00 par value, 25-year, 11.00% bonds with semiannual payments are selling for $972.11. The beta is 0.80, the yield on a 6-month Treasury bill is 3.00%, and the yield on a 25-year Treasury bond is 5.00%. The required return on the stock market is 12.50%, but the market has had an average annual return of 15.50% during the past 5 years. The firm's tax rate is 25%. Which of the following is the best estimate for the weight of debt for use in calculating the WACC? Do not round your intermediate calculations.
a.12.16%
b.56.45%
c.57.14%
d.9.17%
e.11.86%
(26) Sexton Inc. is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. If the decision is made by choosing the project with the higher IRR, how much value will be forgone? Note that under certain conditions choosing projects on the basis of the IRR will not cause any value to be lost because the one with the higher IRR will also have the higher NPV, so no value will be lost if the IRR method is used.
WACC: 11.50%
01234
CFS -$1,800 $760 $770 $780 $790
CFL -$4,800 $1,770 $1,795 $1,820 $1,845
a. $526.89
b. $731.10
c. $163.13
d. $146.31
(27) Fool Proof Software is considering a new project whose data are shown below. The equipment that would be used has a 3-year tax life, and the allowed depreciation rates for such property are 33.0%,45.0%,15.0%, and 7.0% for Years 1 through 4. Under the new tax law, the equipment used in the project is eligible for 100% bonus depreciation, so it will be fully depreciated at t =0. Revenues and other operating costs are expected to be constant over the project's 10-year expected life. What is the Year 1 cash flow?
Equipment cost $55,000
Sales revenues, each year $86,800
Operating costs $22,600
Tax rate 25.0%
a. $64,200
b. $52,688
c. $48,150
d. $66,300
e. $49,113

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