When First National purchased its first ATM, it cost $800,000 and was estimated to have a useful economic life of 10 years. The bank has been depreciating its ATM on a straight-line basis (over 10 years) to an estimated book salvage value of $200,000. The current actual market value of the old ATM is $300,000. Tranax-Mini will cost $1,200,000 and have an expected economic life of 7 years. The bank plans to depreciate the new ATM over 8 years using MACRS. The bank believes that its Mr. Fast will attract new customers, which are expected to generate $250,000 in new revenues during the first year. Revenues from these new customers are expected to grow at 4% per year over the 7-year life of the new ATM. The new ATM will have annual maintenance cost of $20,000 during the first year and to increase at a rate of 3% per year over the annual maintenance costs on the old ATM. First National has a 40% marginal tax rate, and has the following capital structure: Capital Structure Amount (In millions) Debt $50 Preferred Stock $80 Common Stock ($5 par,4 million shares) $20 Paid-in-capital $30 Retained Earnings $45 Equity $95 Total $225 The debt is based on the corporate bond that the company issued several years ago. The bond has a 8% coupon rate, a par value of $1,000 and 10-years maturity left. Today, the bond is selling for $900. The preferred stock was issued at $100 per share with an annual dividend rate of 8%. Today, the preferred stock is trading at $80 per share. The common stock is selling for $50 per share on the stock market and the company is expected to pay $3.0 dividend per share this year that has increased from $1.84 in the last 10 years. Part I 1. What is the net investment required to purchase the new ATM? 2. What are the annual incremental net cash flows for each year of the project's expected 6-year life? 3. What is the cost of capital for the evaluation of the investment? 4. What is the net present value of this project, assuming the ATM to be of average risk? 5. Based on the calculations performed in Questions 1-4, should First National purchase the new ATM? When First National purchased its first ATM, it cost $800,000 and was estimated to have a useful economic life of 10 years. The bank has been depreciating its ATM on a straight-line basis (over 10 years) to an estimated book salvage value of $200,000. The current actual market value of the old ATM is $300,000. Tranax-Mini will cost $1,200,000 and have an expected economic life of 7 years. The bank plans to depreciate the new ATM over 8 years using MACRS. The bank believes that its Mr. Fast will attract new customers, which are expected to generate $250,000 in new revenues during the first year. Revenues from these new customers are expected to grow at 4% per year over the 7-year life of the new ATM. The new ATM will have annual maintenance cost of $20,000 during the first year and to increase at a rate of 3% per year over the annual maintenance costs on the old ATM. First National has a 40% marginal tax rate, and has the following capital structure: Capital Structure Amount (In millions) Debt $50 Preferred Stock $80 Common Stock ($5 par,4 million shares) $20 Paid-in-capital $30 Retained Earnings $45 Equity $95 Total $225 The debt is based on the corporate bond that the company issued several years ago. The bond has a 8% coupon rate, a par value of $1,000 and 10-years maturity left. Today, the bond is selling for $900. The preferred stock was issued at $100 per share with an annual dividend rate of 8%. Today, the preferred stock is trading at $80 per share. The common stock is selling for $50 per share on the stock market and the company is expected to pay $3.0 dividend per share this year that has increased from $1.84 in the last 10 years. Part I 1. What is the net investment required to purchase the new ATM? 2. What are the annual incremental net cash flows for each year of the project's expected 6-year life? 3. What is the cost of capital for the evaluation of the investment? 4. What is the net present value of this project, assuming the ATM to be of average risk? 5. Based on the calculations performed in Questions 1-4, should First National purchase the new ATM
