1. SCI is looking at a new security system with an installed cost of $375,000. The cost will be depreciated straight-line to zero over the projectâs five-year life, at the end of which the system can be sold for $40,000. The security system will save the firm $105,000 per year in pretax operating costs, and it requires an initial investment in net working capital of $28,000, which will be fully recovered at the end of the projectâs life. If tax rate is 34% and discount rate is 10%, what is the NPV of the project?
2. Blur Cream is considering a new project. The machine required for the project costs $3.8 million. The sales related to the project will be $2.5 million per year for the next four years, after which the market will cease to exist. The machine will be depreciated down to zero using the straight-line method. Costs of goods sold will be 25% of sales. Blur also needs to add net working capital of $150,000 immediately. From year one to year four, Blur needs to increase net working capital by $1,000 per year. The net working capital will be recovered in full at the end of the projectâs life. If tax rate is 35% and discount rate is 16%, should Blur accept the project?
3. You are evaluating two machines. The Zig costs $215,000, has a three-year life, and has pretax operatingcosts of $35,000 per year. The Zag costs $270,000, has five-year life, and has pretax operating costs of $44,000 per year. For both machines, use straight-line depreciation to zero over the projectâs life and assume a salvage value of $20,000. If tax rate is 35% and discount rate is 12%, compute the EAC for both machines. Which do you prefer?
4. You are evaluating a project that costs $644,000, has an eight-year life, and has no salvage value. Assume that the depreciation is straight-line to zero over the projectâs life. Sales will be 70,000 units per year. Price per unit is $37, variable cost per unit is $21, and fixed costs are $725,000 per year. Tax rate is 35% and discount rate is 15%.
a) What is the NPV of the project?
b) If sales increase to 77,000, what is the sensitivity of NPV to changesin sales?
c) If variable cost increases to $23.1, what is the sensitivity of OCF to changes in variable cost?
5. Led Inc. has developed a new aircraft. If the aircraft is successful, the present value of the payoff when the product is brought to market is $34 million. If the aircraft fails, the present value of the payoff is $12 million. If the aircraft goes directly to the market, there is a 50% chance of success. Alternatively, Led can delay the launch by one year and spend $1.3 million to test the market. Test marketing would allow the firm to improve the product and increase the probability of success to 80%. If discount rate is11%, should the firm test the market?
6. You are examining a new project that will last for 10 years. The annua loperating cash flow will be $315,000. The discount rate is 16%. The initial investment is $1,350,000.
a) What is the NPV of the project?
b) After first year, the project can be sold for $950,000. At what level of operating cash flow would it make sense to sell the project?
7. Cohen has issued a bond with the following characteristics: Par: $1,000; Time to maturity: 15 years; Coupon rate: 7%; Semiannual payment. What is the price of the bond if the YTM is 9%?
8. The Pane bond has 11.5 years to maturity, a YTM of 7.6%, and a current price of $1,060. The bond makes semiannual payments. What is the coupon rate on this bond?
9. What is the inflation rate if nominal return is 14% and real return is 10%?
10. Jay, Inc. and Nic Corp. both have 7% coupon bonds outstanding with semiannual payments and both are priced at par value. The Jay, Inc. bond has 2 years to maturity, while the Nic Corp. bond has 15 years to maturity. If interest rate suddenly rises from 7% to 9%, what is the percentage change in the price of these bonds? If interest rate suddenly decreases by 2%, what is the percentage change in the price of these bonds?
11. You purchase a bond with an invoice price of $950. The bond has a coupon rate of 6.8%, and there are 2 months to the next semiannual coupon date. What is the clean price of the bond?
1. SCI is looking at a new security system with an installed cost of $375,000. The cost will be depreciated straight-line to zero over the projectâs five-year life, at the end of which the system can be sold for $40,000. The security system will save the firm $105,000 per year in pretax operating costs, and it requires an initial investment in net working capital of $28,000, which will be fully recovered at the end of the projectâs life. If tax rate is 34% and discount rate is 10%, what is the NPV of the project?
2. Blur Cream is considering a new project. The machine required for the project costs $3.8 million. The sales related to the project will be $2.5 million per year for the next four years, after which the market will cease to exist. The machine will be depreciated down to zero using the straight-line method. Costs of goods sold will be 25% of sales. Blur also needs to add net working capital of $150,000 immediately. From year one to year four, Blur needs to increase net working capital by $1,000 per year. The net working capital will be recovered in full at the end of the projectâs life. If tax rate is 35% and discount rate is 16%, should Blur accept the project?
3. You are evaluating two machines. The Zig costs $215,000, has a three-year life, and has pretax operatingcosts of $35,000 per year. The Zag costs $270,000, has five-year life, and has pretax operating costs of $44,000 per year. For both machines, use straight-line depreciation to zero over the projectâs life and assume a salvage value of $20,000. If tax rate is 35% and discount rate is 12%, compute the EAC for both machines. Which do you prefer?
4. You are evaluating a project that costs $644,000, has an eight-year life, and has no salvage value. Assume that the depreciation is straight-line to zero over the projectâs life. Sales will be 70,000 units per year. Price per unit is $37, variable cost per unit is $21, and fixed costs are $725,000 per year. Tax rate is 35% and discount rate is 15%.
a) What is the NPV of the project?
b) If sales increase to 77,000, what is the sensitivity of NPV to changesin sales?
c) If variable cost increases to $23.1, what is the sensitivity of OCF to changes in variable cost?
5. Led Inc. has developed a new aircraft. If the aircraft is successful, the present value of the payoff when the product is brought to market is $34 million. If the aircraft fails, the present value of the payoff is $12 million. If the aircraft goes directly to the market, there is a 50% chance of success. Alternatively, Led can delay the launch by one year and spend $1.3 million to test the market. Test marketing would allow the firm to improve the product and increase the probability of success to 80%. If discount rate is11%, should the firm test the market?
6. You are examining a new project that will last for 10 years. The annua loperating cash flow will be $315,000. The discount rate is 16%. The initial investment is $1,350,000.
a) What is the NPV of the project?
b) After first year, the project can be sold for $950,000. At what level of operating cash flow would it make sense to sell the project?
7. Cohen has issued a bond with the following characteristics: Par: $1,000; Time to maturity: 15 years; Coupon rate: 7%; Semiannual payment. What is the price of the bond if the YTM is 9%?
8. The Pane bond has 11.5 years to maturity, a YTM of 7.6%, and a current price of $1,060. The bond makes semiannual payments. What is the coupon rate on this bond?
9. What is the inflation rate if nominal return is 14% and real return is 10%?
10. Jay, Inc. and Nic Corp. both have 7% coupon bonds outstanding with semiannual payments and both are priced at par value. The Jay, Inc. bond has 2 years to maturity, while the Nic Corp. bond has 15 years to maturity. If interest rate suddenly rises from 7% to 9%, what is the percentage change in the price of these bonds? If interest rate suddenly decreases by 2%, what is the percentage change in the price of these bonds?
11. You purchase a bond with an invoice price of $950. The bond has a coupon rate of 6.8%, and there are 2 months to the next semiannual coupon date. What is the clean price of the bond?
Related questions
| Dog Up! Franks is looking at a new sausage system with an installed cost of $470,000. This cost will be depreciated straight-line to zero over the projectâs five-year life, at the end of which the sausage system can be scrapped for $68,000. The sausage system will save the firm $220,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $27,000. If the tax rate is 34 percent and the discount rate is 10 percent, what is the NPV of this project? |
| Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.4 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life, after which time it will be worthless. The project is estimated to generate $1,980,000 in annual sales, with costs of $675,000. The project requires an initial investment in net working capital of $200,000, and the fixed asset will have a market value of $310,000 at the end of the project. If the tax rate is 34 percent, what is the projectâs Year 0 net cash flow? Year 1? Year 2? Year 3?
| ||||||||||||
