Need help please!
7. You are the manager or a corporation. Ine corporation owns a manuracturing plant that is currently sitting idle. You are able to lease the plant for $500 per year. However, you recently developed a new product, called the mind reader, that can read your thoughts. You have already spent $1,000 developing this product. You are planning to produce the mind reader at this idle facility. The fixed assets for this project will cost $10,000 and be depreciated on a straight-line basis over 10 years. You expect to sell you're the mind reader for $1 each. In year 1 you expect to sell 1,000 mind readers. Afterwards, you I expect to sell 2,000, 3,000, 4,000, and 5,000 units in years 2,3,4, and 5 respectively. You expect your manufacturing costs to be 50% of the sales price per unit. This project will add an additional $200 of fixed overhead costs to your company each year. Also, you will have to invest an additional $500 in net working capital in order to purchase inventory, pay suppliers, and collect your accounts receivable. The corporate tax rate is 30%. After 5 years technology will have advanced such that the mind reader will be obsolete, and this project will be shut down. Your net working capital will be restored to pre-project levels, and you will sell your manufacturing equipment. You estimate that you will be able to sell your manufacturing equipment for $4,000. If your cost of capital is 8.5%, what is the NPV of this project? What is the IRR of this project? What is the payback period for this project? Should you undertake this project? 8. Consider the example from question 7. If you can sell the mind reader for $1.50, all else equal, does this change your decision about whether or not to undertake this project? 9. Consider the example in question 7. If you identify a more efficient method of manufacturing such that your cost of goods sold drops to 30% of sales price (Sales price is $1.00 per unit), all else equal, does this change your decision from question 7? 10. Assume you are interested in investing in a stock. The firm pays out all their income in an annual dividend of $2.00 each year. This dividend is not expected to change ever. The appropriate cost of stock is 12% (This is the discount rate). What is the value of this stock? If you sell this stock in 1 year, what do you expect the sales price to be? 11. Suppose you want to invest in a new tech stock that is growing quickly. The most recent dividend was $0.10. You expect dividends to grow at 30% for the next five years. The 6th year dividend will be 5% larger than the 5th year dividend. At this point dividends will continue to grow at a 5% rate forever. If the applicable cost of stock is 14%, what is the price of this stock? 7. You are the manager or a corporation. Ine corporation owns a manuracturing plant that is currently sitting idle. You are able to lease the plant for $500 per year. However, you recently developed a new product, called the mind reader, that can read your thoughts. You have already spent $1,000 developing this product. You are planning to produce the mind reader at this idle facility. The fixed assets for this project will cost $10,000 and be depreciated on a straight-line basis over 10 years. You expect to sell you're the mind reader for $1 each. In year 1 you expect to sell 1,000 mind readers. Afterwards, you I expect to sell 2,000, 3,000, 4,000, and 5,000 units in years 2,3,4, and 5 respectively. You expect your manufacturing costs to be 50% of the sales price per unit. This project will add an additional $200 of fixed overhead costs to your company each year. Also, you will have to invest an additional $500 in net working capital in order to purchase inventory, pay suppliers, and collect your accounts receivable. The corporate tax rate is 30%. After 5 years technology will have advanced such that the mind reader will be obsolete, and this project will be shut down. Your net working capital will be restored to pre-project levels, and you will sell your manufacturing equipment. You estimate that you will be able to sell your manufacturing equipment for $4,000. If your cost of capital is 8.5%, what is the NPV of this project? What is the IRR of this project? What is the payback period for this project? Should you undertake this project? 8. Consider the example from question 7. If you can sell the mind reader for $1.50, all else equal, does this change your decision about whether or not to undertake this project? 9. Consider the example in question 7. If you identify a more efficient method of manufacturing such that your cost of goods sold drops to 30% of sales price (Sales price is $1.00 per unit), all else equal, does this change your decision from question 7? 10. Assume you are interested in investing in a stock. The firm pays out all their income in an annual dividend of $2.00 each year. This dividend is not expected to change ever. The appropriate cost of stock is 12% (This is the discount rate). What is the value of this stock? If you sell this stock in 1 year, what do you expect the sales price to be? 11. Suppose you want to invest in a new tech stock that is growing quickly. The most recent dividend was $0.10. You expect dividends to grow at 30% for the next five years. The 6th year dividend will be 5% larger than the 5th year dividend. At this point dividends will continue to grow at a 5% rate forever. If the applicable cost of stock is 14%, what is the price of this stock
