Question
A project will produce after-tax operating cash inflows of $3,200 a year for 5 years. The after-tax salvage value of the project is expected to
A project will produce after-tax operating cash inflows of $3,200 a year for 5 years. The after-tax salvage value of the project is expected to be $2,500 in year 5. The projects initial cost is $9,500. What is the net present value of this project if the required rate of return is 16 percent?
A. $311.02
B. $2,168.02
C. $4,650.11
D. $9,188.98
E. $21,168.02
F. None of the options are correct.
Sols Sporting Goods is expanding and, as a result, expects additional operating cash flows of $26,000 a year for 4 years. This expansion requires $39,000 in new fixed assets. These assets will be worthless at the end of the project. In addition, the project requires an additional $3,000 of net working capital throughout the life of the project; Sol expects to recover this amount at the end of the project. What is the net present value of this expansion project at a 16-percent required rate of return?
A. $18,477.29
B. $21,033.33
C. $28,288.70
D. $29,416.08
E. $32,409.57
F. None of the options are correct.
Key facts and assumptions concerning Costco Company, at December 31, 2011, appear below.
Facts and Assumptions: |
|
|
Rate of return on Treasury Notes |
| 3.28% |
Interest rate on company debt |
| 4.62% |
Historical excess return on common stocks |
| 6.10% |
Company equity beta |
| 0.80 |
Stock price | $ | 75.08 |
Number of shares outstanding (millions) |
| 449.5 |
Book value of equity (millions) | $11,585 | |
Book value of interest-bearing debt (millions) | $ | 2,524 |
Tax rate |
| 35.00% |
Use the above information to answer the following questions:
- Estimate Costcos cost of equity capital.
- Estimate Costcos weighted-average cost of capital.
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