Multiple$-$Choice Questions

$1.$ What are the present values of the net tax shields for each option?

a$)$ $$81,266$ and $$131,194$

b$)$ $$339,330$ and $$394,356$

c$)$ $$338,056$ and $$387,984$

d$)$ $$336,579$ and $380,599$

$2.$ What is the IRR for each option? Use the nearest tenth of a percent.

a$)11\mathrm{.}5\%$ and $12\mathrm{.}1\%$

b$)12\mathrm{.}0\%$ and $13\mathrm{.}0\%$

c$)10\mathrm{.}8\%$ and $10\mathrm{.}8\%$

d$)11\mathrm{.}2\%$ and $11\mathrm{.}3\%$

$3.$ Which option has the highest NPV$,$ and by how much over the other option?

a$)$ Option #$2-$ $$53,161$

b$)$ Option #$1-$ $$289,527$

c$)$ Option #$1-$ $$739,537$

d$)$ Option #$2-$ $$769\mathrm{.}023$

$4.$ At what purchase price for Bink and Tashie's would the IRR equal the required rate of return? Use the nearest $$10,000.$

a$)$ $$6,470,000$

b$)$ $$6,560,000$

c$)$ $$6,300,000$

d$)$ $$6,380,000$

$5.$ What would the required rate of return have to be for Katherine to be indifferent between the two options? Use the nearest tenth of a percent.

a$)11\mathrm{.}1\%$

b$)10\mathrm{.}6\%$

c$)11\mathrm{.}2\%$

d$)10\mathrm{.}3\%$

EXHIBIT #$1$

Bink and Tashie's Chocolate

Abbreviated Income Statement

For $2017$

$(\text{'}000$s of Dollars$)$

Sales $2,265$

Cost of Goods Sold $1,430$

Gross Margin $835$

Overhead Salaries

Sales Salaries $300$

Sales Bonus $100$

Office Salaries $100$

Owners' Salaries $200$

Benefits $70$

Total Overhead $770$

Operating Profit $65$

Taxes $(30\%)20$

Net Profit $45$

EXHIBIT #$2$

Option #$1-$ Purchase Bink and Tashie's

Initial Costs

The $$5\mathrm{.}5$ million purchase price consisted of the following:

$1)$ $$2$ million for the building, which was its fair market value and would be used for CCA purposes

$2)$ $$500,000$ for the land

$3)$ $$300,000$ for the machinery, which was its fair market value and would be used for CCA purposes

$4)$ $$2\mathrm{.}7$ million for goodwill

In addition, for the purposes of this analysis, Katherine decided to include the severance packages for the salaried employees as requested by the owners of Bink and Tashie's. In terms of timing, she anticipated letting these people go immediately as she would simply absorb the work these people performed into the existing support functions of Katherine's Chocolate Kompany.

Yearly Cash Flow

In the first year $(2018),$ Katherine anticipated sales being flat relative to the previous year and a cost of sales of $63\%.$

In the second through fifth year, sales were anticipated to grow $4\%$ and then level off in years six through ten.

Cost of goods sold was anticipated to be $62\%$ the second year and $59\%$ from years three through ten.

Katherine anticipated $$20,000$ per year in overhead costs related to travel expenses for salespeople, etc.

Salvage Values

The machinery was expected to have a salvage value of $$10,000$ at the end of the tenth year.

There are no plans to sell the building.

Option #$2-$ Build Factory

Initial Costs

$1)$ Purchase price of building $-$ $$2$ million

$2)$ Purchase price of machinery $-$ $$500,000$

$3)$ Purchase price of land $-$ $$500,000$

Yearly Cash Flow

In the first year $(2018),$ Katherine anticipated sales being $$0\mathrm{.}5$ million and a cost of sales of $70\%.$

In the second year, Katherine anticipated sales being $$0\mathrm{.}7$ million and a cost of sales of $65\%.$

In the third year, Katherine anticipated sales being $$1\mathrm{.}0$ million and a cost of sales of $63\%.$

In the fourth year, Katherine anticipated sales being $$1\mathrm{.}2$ million and a cost of sales of $60\%.$

In the fifth year, Katherine anticipated sales being $$1\mathrm{.}5$ million and a cost of sales of $57\%.$

In the sixth through tenth year, Katherine anticipated sales being $$1\mathrm{.}8$ million and a cost of sales of $57\%.$

In the first year, Katherine anticipated $$60,000$ in overhead costs related to travel expenses for salespeople and senior managers to establish the business. These costs were expected to be $$30,000$ in the second year and $$20,000$ from years three through ten.

Salvage Values

The machinery was expected to have a salvage value of $$50,000$ at the end of the tenth year.

There are no plans to sell the building.

Additional Information

CCA rates $-$ Building $4\%,$ Machinery $20\%$

Tax Rate for Bink and Tashie's $-30\%$

Tax Rate for Katherine's Chocolate Kompany $-40\%$

Required Rate of Return $-8\%$

Time horizon $-10$ years

Please show the work into how you got the answers! Thanks!