Question
You are working on a bid to build four small apartment buildings a year for the next three years for a local community.This project requires
- You are working on a bid to build four small apartment buildings a year for the next three years for a local community.This project requires the purchases of $900,000 of equipment which will be depreciated using straight-line depreciation to a zero book value over the three years.The equipment can be sold at the end of the project for $400,000.You will also need $200,000 in net working capital over the life of the project.The fixed costs will be $475,000 a year and the variable costs will be $140,000 per building.Your required rate of return is 12 percent for this project and your tax rate is 34%.What is the minimal amount, rounded to the nearest $500 that you should bid per building?
- uperior Manufacturers is considering a 3-year project with an initial cost of $846,000.The project will not directly produce any sales but will reduce operating costs by $295,000 per year.The equipment is depreciated straight line to a zero book value over the life of the project.At the end of the project the equipment will be sold for an estimated $30,000.The tax rate is 34%.The project will require $31,000 in extra inventory for spare parts and accessories.Should this project be implemented if Superior Manufacturing requires an 8 percent rate of return?Why or why not?.
- Office Furniture Makers, Inc. uses machines to produce high quality office chairs for other firms.The initial cost of one customized machine is $750,000.This machine costs $12,000 a year to operate.Each machine has a life of 3 years before it is replaced.What is the equivalent annual cost of this machine if the required return is 10 percent? ( Round your answer to whole dollars).
You are considering two independent projects both of which have been assigned a discount rate of 9 percent.Based on the profitability index, what is your recommendation concerning these projects?SHOW WORKING
Project AProject B
Year Cash FlowYear Cash Flow
0 -$42,500 0 -$45,000
1 $24,000 1 $15,000
2 $24,000 2 $38,000
4 Pearson Internation Souvenir Shop has a cost of debt of 8 percent, a cost of equity of 12 percent, and a cost of preferred stock of 9 percent.The firm has 116,000 shares of common stock outstanding at a market price of $24 a share.There are 51,000 shares of preferred stock outstanding at a market price of $38 a share.The bond issue has a face value of $900,000 and a market quote of 105.The company's tax rate is 35%.What is the weighted average cost of capital for Pearson International Souvenir Shop?
5.Akelius Property Management is considering a project which has an initial start up cost of $840,000.The firm maintains a debt equity ratio of .60.The flotation cost of debt is 8 percent and the flotation cost of equity is 13 percent.The firm has sufficient internally generated equity to cover the equity cost of this project.What is the initial cost of the project including the flotation costs?
6 Barbie and Ken Company needs to purchase new plastic moulding machines to meet the demand for its product.The cost of the equipment is $100,000.It is estimated that the firm will increase operating cash flow(OCF) by $22,000 annually for the next seven years.The firm is financed with 40% debt and 60% equity, both based on market values.The firm's cost of equity is 16% and its pre-tax cost of debt is 8%.The flotation costs of debt and equity are 2% and 8%, respectively.Assume the firm's tax rate is 34%.
1. What is the WACC?
2. What is the NPV of the Proposed Project.
7.Explain the interactions between Market Efficiency, Capital Budgeting, and the Cost of Capital.
8.Explain what is meant by the Top Down Approach and the Buttom Up Approach.
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