Replacement Analysis The Everly Equipment Company's flange-lipping machine was purchased 5 years ago for $100,000. It had an expected life of 10 years when it was bought and its remaining depreciation is $10,000 per year for each year of its remaining life. As older flange-lippers are robust and useful machines, this one can be sold for $20,000 at the end of its useful life. A new high-efficiency digital-controlled flange-lipper can be purchased for $140,000, including installation costs. During its 5-year life, it will reduce cash operating expenses by $55,000 per year, although it will not affect sales. At the end of its useful life, the high-efficiency machine is estimated to be worthless. MACRS depreciation will be used, and the machine will be depreciated over its 3-year class life rather than its 5-year economic life, so the applicable depreciation rates are 33.33%, 44.45%, 14.81%, and 7.41%. The old machine can be sold today for $55,000.

The firm's tax rate is 35%, and the appropriate cost of capital is 13%. If the new flange-lipper is purchased, what is the amount of the initial cash flow at Year 0? Round your answer to the nearest whole dollar. $

What are the incremental net cash flows that will occur at the end of Years 1 through 5? Do not round intermediate calculations. Round your answers to the nearest whole dollar. CF1 $ CF2 $ CF3 $ CF4 $ CF5 $ What is the NPV of this project? Do not round intermediate calculations. Round your answer to the nearest whole dollar. $

Should Everly replace the flange-lipper?

You own a 10-acre vineyard and earn income by selling your grapes to wineries. Your vineyard is currently planted to Merlot grapes, but you are thinking of replanting with Syrah grapes because they are commanding a higher market price per ton. Merlot fetches $1600 per ton but Syrah sells for $2700 per ton, those prices are expected to remain stable, and you produce 5 tons per year per acre (so 50 tons per year total). Either way, you plan to sell the vineyard 5 years from now (at the end of the year) for 5-times (5x) the annual income (in year 5) from the sale of grapes (that is, you'll get the income from grape sales and then sell the vineyard for 5 times that amount at the end of year 5). However, if you switch to Syrah, it will cost you $106,000 immediately and the vines won’t produce any grapes until year 4 (that is, years 1-3 will have no sales if you plant Syrah, but years 4 and 5 will). The applicable discount rate is 10% per year. What is the NPV of switching? Round to the nearest cent. [Hint: Create a timeline showing the incremental annual cash flows from switching and find their NPV. Some cash flows will be negative (first 3 years) and some (years 4 and 5) will be positive.

Ann is looking for a fully amortizing 30 year Fixed Rate Mortgage with monthly payments for $3,200,000.

Mortgage A has a 4.38% interest rate and requires Ann to pay 1.5 points upfront.

Mortgage B has a 6% interest rate and requires Ann to pay zero fees upfront.

Assuming Ann makes payments for 30 years, what is Ann’s annualized IRR from mortgage B?

Ann is looking for a fully amortizing 30 year Fixed Rate Mortgage with monthly payments for $3,200,000. Mortgage A has a 4.38% interest rate and requires Ann to pay 1.5 points upfront. Mortgage B has a 6% interest rate and requires Ann to pay zero fees upfront. Assuming Ann makes payments for 2 years before she sells the house and pays the bank the balance, what is Ann’s annualized IRR from mortgage B?

1. A firm is considering two mutually exclusive projects, A and B. The projects are different in that they have different returns depending on general economic conditions. The firm forecasts that return on the market, and the returns on each project, along with their associated probabilities will be given by the following table. You can assume a 5% risk free rate and a 6% market risk premium. Assume the CAPM holds. Compare the expected returns to the cost of capital for each project and decide which project the firm should choose.

Here are data on two firms:

a-1. Calculate the higher economic value added? (Do not round intermediate calculations. Enter your answers in millions)

a-2. Which firm has the higher economic value added?

b-1. Calculate the higher economic value added per dollar of invested capital? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

b-2. Which has higher economic value added per dollar of invested capital?

 Sunrise Industries wishes to accumulate funds to provide a retirement annuity for its vice president of​ research, Jill Moran. Ms.​ Moran, by​ contract, will retire at the end of exactly 12 years. Upon​ retirement, she is entitled to receive an annual​ end-of-year payment of $ 42,000 for exactly 20 years. If she dies prior to the end of the 20-year period, the annual payments will pass to her heirs. During the 12 year "accumulation period," Sunrise wishes to fund the annuity by making​ equal, annual, ​ end-of-year deposits into an account earning 9.0 % interest. Once the 20 year "distribution period"​ begins, Sunrise plans to move the accumulated monies into an account earning a guaranteed 12.0% per year. At the end of the distribution​ period, the account balance will equal zero. Note that the first deposit will be made at the end of year 1 and that the first distribution payment will be received at the end of year 13.

To Do

a. Draw a time line depicting all of the cash flows associated with​ Sunrise's view of the retirement annuity.

b. How large a sum must Sunrise accumulate by the end of year 12 to provide the 20-year, $42,000 annuity?

c. How large must​ Sunrise's equal, ​ annual, end-of-year deposits into the account be over the 12​-year accumulation period to fund fully Ms.​ Moran's retirement​ annuity?

d. How much would Sunrise have to deposit annually during the accumulation period if it could earn

10.0 % rather than 9.0 % during the accumulation​ period?

e. How much would Sunrise have to deposit annually during the accumulation period if Ms.​ Moran's retirement annuity were a perpetuity and all other terms were the same as initially​ described?

A protective collar involves buying an out-of-the-money put and writing an out-of-the-money call on an underlying asset that you own. Let’s say you own an S&P 500 index security that is currently trading at $30/share. You bought the index at $10 per share so you currently have a big capital gain. You don’t want to sell your shares, but you want to lock in your profits with a protective collar for the next year. You want to make sure you can sell your shares for at least $29/share. The standard deviation of returns on the S&P 500 is 20% and the assume risk free rate is 2%.

a) How much would it cost to buy the put?

b) What strike price should you set on the call so that you make the same premium that you paid for the put (zero net cost)?

c) Draw the net profit diagram for the entire protective collar position (long stock, long put, short call) at maturity (including the premiums). Carefully label in detail all axis, strike prices, payoffs, etc.
 

Mary owns a U.S. based company and wants to open a store in Japan. She will have to exchange her USD for Yen in order to finance the rent and payroll. Which of the following situations would put her at the greatest advantage as far as the exchange rates go?  

Derek currently has $10,773.00 in an account that pays 5.00%. He will withdraw $5,493.00 every other year beginning next year until he has taken 6.00 withdrawals. He will deposit $10773.0 every other year beginning two years from today until he has made 6.0 deposits. How much will be in the account 29.00 years from today?

Please explain steps in detail, thanks!

• Give an example of a situation where a building contractor may want to use the discounted cash flow (DCF) analysis method.
• Discuss a situation where a method to determine a project’s valuation, other than discounted cash flow (DCF) analysis, would be favorable.

Discuss the statement, "Good budgeting is essential".

Suppose the IRS imposes a 20% tax on profits. Return to the original situation (200 pairs, 80 price per pair sold, 60 operating cost per pair).

-How much tax is paid?

-What are “Before-Tax Profits,” After-Tax Profits” and “After-Tax ROE?”

-Similar to the in-class example, what are the percentage changes in revenue, taxes, before- and after-tax profits due to a ten percent increase in unit sales?

-Say a weakening macro-economy causes shoe sales to decline to 110. What are “Before-Tax Profits,” After-Tax Profits” and “After-Tax ROE?”

Keep sales at 200 pairs. But labor costs (wages, benefits, pensions) jump to 75/pair from 40. Perform the same calculations. Why is this loss making situation qualitatively different from the above?

Balance Sheet Data

               Long-Term Debt               80,000,000

               Preferred Stock                20,000,000

               Common Equity                20,000,000

Number of shares of Common                 1,500,000                         Price per share Common             $42

Number of shares of Preferred                     150,000                               Price per share Preferred            $108

Number of 8% Coupon 25-year Bonds          40,000               Price of 8% 25-year Bonds   $1075

Number of 6% Coupon 15-year Bonds          40,200                           Price of 6% 15-year Bonds   $920

Forecasted Dividend on Common (D₁)             $3.30                           Dividend Rate on Preferred            9.5%

Par Value of Preferred                                           $100                                 Current 10-Year Treasury Yld.        4.3%

Standard Deviation of Stock                                   40%                              Correlation Stock vs. Market 0.50

Standard Deviation of Market                                15%                      Market Risk Premium                    5.0%

Risk Premium of our Stock over our 15-yr Bonds          3.9%        Forecasted Constant Growth             3.0%

Tax Rate                                                                       25%                        Flotation costs on Bonds               1.4%

Flotation costs on Preferred                                   2.4%

1. Calculate the appropriate weights to use for the financing sources. (Hint: Assume that the firm feels their current mix of long-term debt is good and would like to raise capital with the same mix of maturities)
2. Calculate the after-tax cost of debt (hint: You can account for the two bonds by taking a weighted average of their cost or by keeping them separate and putting both into the WACC formula at their individual weights). Note that there are flotation costs of 1.4% on bonds.
3. Calculate the cost of preferred. Note that there are flotation costs of 2.4% on preferred stock.
4. Calculate the cost of common (Hint: Use all three methods and take an average). Note that all common equity will come from internally generated equity (retained earnings) which means no new shares will be issued and no flotation costs incurred.
5. Calculate the WACC
6. Why are firms likely to prefer internally generated equity to issuing new shares of common? Identify and briefly explain two reasons.
7. If my firm had two separate divisions – one relatively low risk and one relatively high risk, how might I apply the WACC to each division?

16. If you deposit $1000 at the end of each of the next 10 years, how much will you have in 20 years if you earn 10% APR compounded annually?A. $41,338B. $40,187C. $42,492D. $43,937E. $42,531

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