4. Three are three projects listed below. The firm’s required rate of return is 13%.

Year Project AB Project LM Project UV

0 $ (90,000) $ (100,000) $ (96,500)

1 39,000 0 (55,000)

2 39,000 0 100,000

3 39,000 147,500 100,000

a) Compute net present value and internal rate of return of each project

Project AB LM UV

NPV

IRR

b) If three projects are mutually exclusive, which one should be chosen?

c) What is the discount rate when NPVAB equals NPVUV (i.e., crossover rate)?

ΔCF0= ΔCF1= ΔCF2= ΔCF3=

IRR=

d) Compute the traditional payback period for each project.

e) Please follow the steps below to compute modified IRR (MIRR) of Project UV.

1) PV of cash outflows:

2) FV of cash inflows:

3) MIRR

By applying capital to investments with long-term benefits, the company is attempting to produce value. This value is dependent on expected future cash flows as well as on the cost of funds.” Explain this statement with regards to the role of cost of capital in financial management decisions.

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.

1. Calculate the project's NPV. Round your answer to the nearest dollar.
   $  
   Calculate the project's IRR. Round your answer to two decimal places.
        %
   Calculate the project's MIRR. Round your answer to two decimal places.
        %
   Calculate the project's payback. Round your answer to two decimal places.
        
2. 
   
3. 
   
4. 
   
5. 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.
   $
6. 
   
7. 
   
8. 
   
9. 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.

The following market information was gathered for the Rogue Corporation. The firm has​ 5,000 bonds​ outstanding, each selling for​ $1,050.00 with a required rate of return of​ 7.00%. Rogue has​ 3,000 shares of preferred stock​ outstanding, selling for​ $60.00 per share and​ 80,000 shares of common stock​ outstanding, selling for​ $24.00 per share. If the preferred stock has a required rate of return of​ 9.00% and the common stock requires a​ 11.00% return, and the firm has a corporate tax rate of​ 20%, calculate the​ firm's WACC adjusted for taxes.

Replacement Analysis

DeYoung Entertainment Enterprises is considering replacing the latex molding machine it uses to fabricate rubber chickens with a newer, more efficient model. The old machine has a book value of $800,000 and a remaining useful life of 5 years. The current machine would be worn out and worthless in 5 years, but DeYoung can sell it now to a Halloween mask manufacturer for $265,000. The old machine is being depreciated by $160,000 per year for each year of its remaining life.

The new machine has a purchase price of $1,175,000, an estimated useful life and MACRS class life of 5 years, and an estimated salvage value of $105,000. The applicable depreciation rates are 20.00%, 32.00%, 19.20%, 11.52%, 11.52%, and 5.76%. Being highly efficient, it is expected to economize on electric power usage, labor, and repair costs, and, most importantly, to reduce the number of defective chickens. In total, an annual savings of $255,000 will be realized if the new machine is installed. The company's marginal tax rate is 35% and the project cost of capital is 15%.

1. What is the initial net cash flow if the new machine is purchased and the old one is replaced? Round your answer to the nearest dollar.
   $
2. 
   
3. 
   
4. 
   
5. Calculate the annual depreciation allowances for both machines, and compute the change in the annual depreciation expense if the replacement is made. Do not round intermediate calculations. Round your answers to the nearest dollar.

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

6. 
   
7. What are the incremental net cash flows in Years 1 through 5? Do not round intermediate calculations. Round your answers to the nearest dollar.

   CF1	$
   CF2	$
   CF3	$
   CF4	$
   CF5	$

8. 
   
9. Should the firm purchase the new machine?
   -Select-
   
   Support your answer. Do not round intermediate calculations. Round your answer to the nearest dollar.
   
   NPV: $

NPV AND IRR

A store has 5 years remaining on its lease in a mall. Rent is $2,100 per month, 60 payments remain, and the next payment is due in 1 month. The mall's owner plans to sell the property in a year and wants rent at that time to be high so that the property will appear more valuable. Therefore, the store has been offered a "great deal" (owner's words) on a new 5-year lease. The new lease calls for no rent for 9 months, then payments of $2,600 per month for the next 51 months. The lease cannot be broken, and the store's WACC is 12% (or 1% per month).

A) Should the new lease be accepted? (Hint: Be sure to use 1% per month.) Yes or No?

B) If the store owner decided to bargain with the mall's owner over the new lease payment, what new lease payment would make the store owner indifferent between the new and old leases? (Hint: Find FV of the old lease's original cost at t = 9; then treat this as the PV of a 51-period annuity whose payments represent the rent during months 10 to 60.) Round your answer to the nearest cent. Do not round your intermediate calculations.

C) The store owner is not sure of the 12% WACC—it could be higher or lower. At what nominal WACC would the store owner be indifferent between the two leases? (Hint: Calculate the differences between the two payment streams; then find its IRR.) Round your answer to two decimal places. Do not round your intermediate calculations.

Kuhn Co. is considering a new project that will require an initial investment of $20 million. It has a target capital structure of 45% debt, 4% preferred stock, and 51% common equity. Kuhn has noncallable bonds outstanding that mature in five years with a face value of $1,000, an annual coupon rate of 10%, and a market price of $1,050.76. The yield on the company’s current bonds is a good approximation of the yield on any new bonds that it issues. The company can sell shares of preferred stock that pay an annual dividend of $9 at a price of $92.25 per share. Kuhn does not have any retained earnings available to finance this project, so the firm will have to issue new common stock to help fund it. Its common stock is currently selling for $33.35 per share, and it is expected to pay a dividend of $1.36 at the end of next year. Flotation costs will represent 8% of the funds raised by issuing new common stock. The company is projected to grow at a constant rate of 8.7%, and they face a tax rate of 40%. What will be the WACC for this project?

Case Study:

ABC Company is med-sized company whose credit-rating in the market is average (Single A, according to S&P rating). The company is willing to finance a project whose cost is around QR 100 million and to be repaid over the next 10 years (Fixed Payment Loan). As the company rating is average, it can borrow from the bank at the average cost of borrowing which ranges from 5% to 7.5% or it can sell 10-year bonds at par, face value of each is QR 10,000, annual coupon payment is 5.8%. If the bonds advertising cost and cost of other listing requirements is QR 1.25 million to be repaid at the end of the first year. For sure, the firm thinks of the alternative that is cheaper and feasible in the light of its financial creditworthiness.

Case Requirements

1. What are the available sources to raise for funds for a typical Qatari company? Can you categorize these sources in a logical way?
2. What are the advantages and the disadvantages of the main sources of funds for a typical Qatari Company that you raised in the previous answer?
3. Suppose the cost of borrowing from banks is 6% based on the creditworthy of the borrower, while from financial Markets is around 5.80% without listing and issuing cost. Which is better for the ABC company to borrow from banks or to sell bonds on the markets based on the cost of each source and in the light of the data provided above? Attach the Excel sheet that shows your detailed calculations and the steps of calculations.
4. Explain in detail the reason for taking your decision in Question 3? Furthermore, raise other factors, which might deter the decision from choosing the source of funds indicated in Question 3?)

At the present time, Omni Consumer Products Company (OCP) has 15-year noncallable bonds with a face value of $1,000 that are outstanding. These bonds have a current market price of $1,329.55 per bond, carry a coupon rate of 12%, and distribute annual coupon payments. The company incurs a federal-plus-state tax rate of 30%. If OCP wants to issue new debt, what would be a reasonable estimate for its after-tax cost of debt (rounded to two decimal places)? (Note: Round your YTM rate to two decimal place.)

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 $150,000, including installation costs. During its 5-year life, it will reduce cash operating expenses by $45,000 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 $50,000. The firm's tax rate is 35%, and the appropriate cost of capital is 13%.

1. 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.
   $
2. 
   
3. 
   
4. 
   
5. 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	$

6. 
   
7. 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?
     

Your firm is contemplating the purchase of a new $580,000 computer-based order entry system. The system will be depreciated straight-line to zero over its five-year life. It will be worth $92,000 at the end of that time. You will be able to reduce working capital by $117,000 (this is a one-time reduction). The tax rate is 24 percent and the required return on the project is 12 percent. If the pretax cost savings are $150,000 per year, what is the NPV of this project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

If the pretax cost savings are $115,000 per year, what is the NPV of this project? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

At what level of pretax cost savings would you be indifferent between accepting the project and not accepting it? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Explain the financial Manager's critical areas of decision-making. Under each area of critical decision-making, identify two

questions the manager must ask him/herself and answer in the process of decision-making.

ou must evaluate a proposal to buy a new milling machine. The base price is $104,000, and shipping and installation costs would add another $18,000. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $36,400. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The machine would require a $8,000 increase in net operating working capital (increased inventory less increased accounts payable). There would be no effect on revenues, but pretax labor costs would decline by $60,000 per year. The marginal tax rate is 35%, and the WACC is 9%. Also, the firm spent $4,500 last year investigating the feasibility of using the machine.

1. How should the $4,500 spent last year be handled?
   1. Last year's expenditure should be treated as a terminal cash flow and dealt with at the end of the project's life. Hence, it should not be included in the initial investment outlay.
   2. Last year's expenditure is considered an opportunity cost and does not represent an incremental cash flow. Hence, it should not be included in the analysis.
   3. Last year's expenditure is considered a sunk cost and does not represent an incremental cash flow. Hence, it should not be included in the analysis.
   4. The cost of research is an incremental cash flow and should be included in the analysis.
   5. Only the tax effect of the research expenses should be included in the analysis.
   
   -Select-IIIIIIIVV
   
2. What is the initial investment outlay for the machine for capital budgeting purposes, that is, what is the Year 0 project cash flow? Enter your answer as a positive value. Round your answer to the nearest cent.
   $  
   
3. What are the project's annual cash flows during Years 1, 2, and 3? Do not round intermediate calculations. Round your answers to the nearest cent.
   Year 1: $  
   Year 2: $  
   Year 3: $  
   
4. Should the machine be purchased?
   -Select-YesNo

A pair of white shoe costs $20 today, and will cost $31 one year from today. The same pair of shoe currently costs 275 pesos today, and will cost 856 pesos one year from today. If there are no arbitrages, how many dollars will you get for a peso one year from today?