REPLACEMENT ANALYSIS

The Bigbee Bottling Company is contemplating the replacement of one of its bottling machines with a newer and more efficient one. The old machine has a book value of $550,000 and a remaining useful life of 5 years. The firm does not expect to realize any return from scrapping the old machine in 5 years, but it can sell it now to another firm in the industry for $265,000. The old machine is being depreciated by $110,000 per year, using the straight-line method.

The new machine has a purchase price of $1,100,000, an estimated useful life and MACRS class life of 5 years, and an estimated salvage value of $120,000. The applicable depreciation rates are 20%, 32%, 19%, 12%, 11%, and 6%. It is expected to economize on electric power usage, labor, and repair costs, as well as to reduce the number of defective bottles. In total, an annual savings of $250,000 will be realized if the new machine is installed. The company's marginal tax rate is 35%, and it has a 12% WACC.

1. What initial cash outlay is required for the new machine? Round your answer to the nearest dollar. Negative amount should be indicated by a minus sign.
   $
   
2. Calculate the annual depreciation allowances for both machines and compute the change in the annual depreciation expense if the replacement is made. Round your answers to the nearest dollar.

   Year	Depreciation Allowance, New	Depreciation Allowance, Old	Change in Depreciation
   1	$	$	$
   2
   3
   4
   5

3. What are the incremental net cash flows in Years 1 through 5? Round your answers to the nearest dollar.

   Year 1	Year 2	Year 3	Year 4	Year 5
   $	$	$	$	$

4. Should the firm purchase the new machine?
   -Select-YesNoItem 22
   
   Support your answer. The input in the box below will not be graded, but may be reviewed and considered by your instructor.
   
5. In general, how would each of the following factors affect the investment decision, and how should each be treated?
   1. The expected life of the existing machine decreases.

   The input in the box below will not be graded, but may be reviewed and considered by your instructor.

   2. The WACC is not constant, but is increasing as Bigbee adds more projects into its capital budget for the year.

   The input in the box below will not be graded, but may be reviewed and considered by your instructor.

A) Madison Manufacturing is considering a new machine that costs $350,000 and would reduce pre-tax manufacturing costs by $110,000 annually. Madison would use the 3-year MACRS method to depreciate the machine, and management thinks the machine would have a value of $33,000 at the end of its 5-year operating life. The applicable depreciation rates are 33.33%, 44.45%, 14.81%, and 7.41%. Working capital would increase by $35,000 initially, but it would be recovered at the end of the project's 5-year life. Madison's marginal tax rate is 40%, and a 9% cost of capital is appropriate for the project.

Calculate the project's NPV. Round your answer to the nearest dollar. $ 25890

Calculate the project's IRR. Round your answer to two decimal places. 11.64 %

Calculate the project's MIRR. Round your answer to two decimal places. 10.43 %

Calculate the project's payback. Round your answer to two decimal places.

B) Assume management is unsure about the $110,000 cost savings - this figure could deviate by as much as plus or minus 20%. Calculate the NPV if cost savings value deviate by plus 20%. Round your answer to the nearest dollar. $

Calculate the NPV if cost savings value deviate by minus 20%. Round your answer to the nearest dollar. $

C) Suppose the CFO wants you to do a scenario analysis with different values for the cost savings, the machine's salvage value, and the working capital (WC) requirement. She asks you to use the following probabilities and values in the scenario analysis: Scenario Probability Cost Savings Salvage Value WC Worst case 0.30 $ 88,000 $28,000 $40,000 Base case 0.40 110,000 33,000 35,000 Best case 0.30 132,000 38,000 30,000

Calculate the project's expected NPV. Round your answer to the nearest dollar. $

Calculate the project's standard deviation. Round your answer to the nearest dollar. $

Calculate the project's coefficient of variation. Round your answer to two decimal places.

Madsen Motors's bonds have 23 years remaining to maturity. Interest is paid annually; they have a $1,000 par value; the coupon interest rate is 8.5%; and the yield to maturity is 7%. What is the bond's current market price? Round your answer to the nearest cent.

Universal Electronics is considering the purchase of manufacturing equipment with a 10-year midpoint in its asset depreciation range (ADR). Carefully refer to Table 12–11 to determine in what depreciation category the asset falls. (Hint: It is not 10 years.) The asset will cost $275,000, and it will produce earnings before depreciation and taxes of $90,000 per year for three years, and then $44,000 a year for seven more years. The firm has a tax rate of 35 percent. Assume the cost of capital is 13 percent. In doing your analysis, if you have years in which there is no depreciation, merely enter a zero for depreciation. Use Table 12–12. Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods.

a. Calculate the net present value. (Do not round intermediate calculations and round your answer to 2 decimal places.)

b. Based on the net present value, should Universal Electronics purchase the asset? Yes No

4. Now with $150,000 bonus that will be saved today, Michelle will then make 4 additional equal payments each year from 2019 to 2022 to end up with $150,000 at the end of 2022. If Citi Bank still pays 3.5% interest annual, how large must each payment be?

5. Assume after 5 years, Michelle will be 40 years old and will have $200,000 in her saving account, and she is planning to retire at 65 years old and she will need $1,200,000 at retirement. What annual interest rate must she earn to reach her goal, assuming each year she will only save $20,000.

Assume that you are preparing a budget for your department or organization. Outline the steps you would take to prepare the budget, providing specific examples for each step.

 Zetatron is an all-equity firm with 100 million shares outstanding, which are currently trading for $7.50 per share. A month ago, Zetatron announced it will change its capital structure by borrowing $100 million in short-term debt, borrowing $100 million in long-term debt, and issuing $100 million of preferred stock. The $300 million raised by these issues, plus another $50 million in cash that Zetatron already has, will be used to repurchase existing shares of stock. The transaction is scheduled to occur today. Assume perfect capital markets.

What is the market value balance sheet for Zetatron

i. Before this transaction?

ii. After the new securities are issued but before the share repurchase?

iii. After the share repurchase?

At the conclusion of this transaction, how many shares outstanding will Zetatron have, and what will the value of those shares be?

Market Value Balance Sheet After Each Stage of Zetatron's Leveraged Recapitalization ($ millions)

Pension funds pay lifetime annuities to recipients. If a firm will remain in business indefinitely, the pension obligation will resemble a perpetuity. Suppose, therefore, that you are managing a pension fund with obligations to make perpetual payments of $1.3 million per year to beneficiaries. The yield to maturity on all bonds is 14.0%.

a. If the duration of 5-year maturity bonds with coupon rates of 10.0% (paid annually) is four years and the duration of 20-year maturity bonds with coupon rates of 5% (paid annually) is 11 years, how much of each of these coupon bonds (in market value) will you want to hold to both fully fund and immunize your obligation? (Do not round intermediate calculations. Enter your answers in millions rounded to 1 decimal place.)

b. What will be the par value of your holdings in the 20-year coupon bond? (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.)

A-Rod Manufacturing Company is trying to calculate its cost of capital for use in making a capital budgeting decision. Mr. Jeter, the vice-president of finance, has given you the following information and has asked you to compute the weighted average cost of capital. The company currently has outstanding a bond with a 11.3 percent coupon rate and another bond with an 8.9 percent rate. The firm has been informed by its investment banker that bonds of equal risk and credit rating are now selling to yield 12.2 percent. The common stock has a price of $67 and an expected dividend (D1) of $1.87 per share. The historical growth pattern (g) for dividends is as follows:

$ 1.42

1.56

1.71

1.87

The preferred stock is selling at $87 per share and pays a dividend of $8.30 per share. The corporate tax rate is 30 percent. The flotation cost is 3.0 percent of the selling price for preferred stock. The optimal capital structure for the firm is 30 percent debt, 10 percent preferred stock, and 60 percent common equity in the form of retained earnings.

a. Compute the historical growth rate. (Do not round intermediate calculations. Round your answer to the nearest whole percent and use this value as g. Input your answer as a whole percent.)

b. Compute the cost of capital for the individual components in the capital structure. (Use the rounded whole percent computed in part a for g. Do not round any other intermediate calculations. Input your answers as a percent rounded to 2 decimal places.)

c. Calculate the weighted cost of each source of capital and the weighted average cost of capital. (Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places.)

You are given the following information for Lightning Power Co. Assume the company's tax rate is 24 percent.

Debt: 14,000 6.3 percent coupon bonds outstanding, $1,000 par value, 29 years to maturity, selling for 107 percent of par; the bonds make semiannual payments.

Common Stock: 470,000 shares outstanding, selling for $65 per share; beta is 1.16.

Preferred stock: 20,500 shares of 4.1 percent preferred stock outstanding, currently selling for $86 per share. The par value is $100 per share.

Market: 7 percent market risk premium and 5.2 percent risk-free rate.

What is the company's WACC?

Masterson, INC., has 7 million shares of common stock outstanding. The current share price is $83, and the book value per share is $8. The company also has two bond issues outstanding. The first bond issue has a face value os $140 million, has a coupon rate of 6 percent, and sells for 94 percent of par. The second issue has a face value of $125 million, has a coupon rate of 5 percent, and sells for 105 percent of par. The first issue matures in 25 years, the second in 8 years. Both bonds make semiannual coupon payments.

a. What are the company's capital structure weights on a book value basis?

b.What are the company's capital structure weights on a market value basis?

c.Which are more relevant, the book or market value weights?

Kingston Corp. is considering a new machine that requires an initial investment of $550,000 installed, and has a useful life of 8 years. The expected annual after-tax cash flows for the machine are $89,000 during the first three years, $95,000 during years 4 through 6 and $105,000 during the last two years.

(1) Develop the timeline.

(2) Calculate the internal rate of return (IRR).

(3) Calculate the net present value (NPV) at the following required rates of return: a. 3%, b. 4%, c. 8%, d. 9%.

(4) Using IRR and NPV criterion, comment if the project should be accepted or rejected at each of the required rates of return in question (3).

(5) Plot the net present value (NPV) profile with NPV on the Y-axis, and rates of return on the X-axis.