Froogle Enterprises is evaluating an unusual investment project. What makes the project unusual is the stream of cash inflows and outflows shown in the following​ table:

Year 1 $210,000

Year 2 -$966,000

Year 3 $1,661,100

Year 4 -$1,265,460

Year 5 $360,360

.

1.  Why is it difficult to calculate the payback period for this​ project?

2.  Calculate the​ investment's net present value at each of the following discount​ rates: 0%, 5​%, 10​%, 15​%, 20%, 25%, 30%​, 35%.

3.  What does your answer to part b tell you about this ​project's IRR​?

4.  Should Froogle invest in this project if its cost of capital is 5%? What if the cost of capital is 15%?

5.  In​ general, when faced with a project like​ this, how should a firm decide whether to invest in the project or reject​ it?

1.  Why is it difficult to calculate the payback period for this​ project? ​ (Select the best answer​ below.)

A.The huge amount of cash outflow in year 3 makes the calculation difficult.

B.The oscillating cash flows make it difficult to compute the payback period.

C.The short life of the project makes it difficult to compute the payback period.

D.It is unreal for a project to have a cash inflow as an initial investment.

2. If the discount rate is 0%, the​ investment's NPV is . ​$______(Round to two decimal​ places.)

If the discount rate is 5​%, the​ investment's NPV is . $________​(Round to two decimal​ places.)

If the discount rate is 10%, the​ investment's NPV is $________(Round to two decimal​ places.)

If the discount rate is 15​%, the​ investment's NPV is ​$________(Round to two decimal​ places.)

If the discount rate is 20%, the​ investment's NPV is $________(Round to two decimal​ places.)

If the discount rate is 25%, the​ investment's NPV is $________​(Round to two decimal​ places.)

If the discount rate is 30%, the​ investment's NPV is ​$________​(Round to two decimal​ places.)

If the discount rate is 35%, the​ investment's NPV is $________(Round to two decimal​ places.)

3.  What does your answer to part b tell you about this ​project's ​IRR?  ​(Select the best answer​ below.)

A. There are multiple IRRs for this project.

B. There are infinite IRRs for this project.

C. There is no IRR for such cash flows.

D. There is only one IRR for this project.

4.  Should Froogle invest in this project if its cost of capital is 5​%?

A. Yes

B. No

Should Froogle invest in this project if its cost of capital is 15%?

A.Yes

B.No

5.  In​ general, when faced with a project like​ this, how should a firm decide whether to invest in the project or reject​ it?  ​(Select the best answer​ below.)

A.It is best to use the IRR method.

B.It is best to use the payback period method.

C.It is best to use the NPV method.

D.None of the methods is suitable.

Company A and Company B are identical in every respect except Company A is unlevered and Company B has $1 million of perpetual debt with an interest rate of 6%. Expected EBIT for both firms is $900,000 in perpetuity and all available earnings are immediately distributed to common shareholders. Company A's cost of equity is 18%. Assume all M&M assumptions are satisfied.

For parts (a) to (c), assume there are no personal or corporate taxes
(a) According to M&M Proposition I without taxes, what is the value of each firm?
(b) According to M&M Proposition II without taxes, what is the cost of equity for Company B?
(c) According to M&M Proposition II without taxes, what is the WACC for each firm?

For parts (d) to (f), assume there are no personal taxes but the corporate tax for both companies is 30%
(d) According to M&M Proposition I with taxes, what is the value of each firm?
(e) According to M&M Proposition II with taxes, what is the cost of equity for Company B?
(f) According to M&M Proposition II with taxes, what is the WACC for each firm?

Masters Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $485,000 is estimated to result in $205,000 in annual pretax cost savings. The press falls in the MACRS five-year class, and it will have a salvage value at the end of the project of $74,000. The press also requires an initial investment in spare parts inventory of $40,000, along with an additional $4,100 in inventory for each succeeding year of the project. The shop’s tax rate is 25 percent and its discount rate is 8 percent. (MACRS schedule) Calculate the NPV of this project.

1. An investment has a cost of $3500. The investment will have a payout of X at the end of the first year. This initial payout X will grow at the rate of 12% per year for the next 4 years, then by 7% per year for the next 4 years, and then at the rate of 3% per year for the following 3 years. You believe the riskiness of this investment is 9%.
   1. Calculate the smallest X that would entice you to invest.

Amortization schedule with periodic

payments.

  Moulton Motors is advertising the following deal on a new Honda​ Civic: ​ "Monthly payments of

​$400.40400.40

for the next

6060

months and this beauty can be​ yours!" The sticker price of the car is

$ 18 comma 000$18,000.

If you bought the​ car, what interest rate would you be paying in both APR and EAR​ terms? What is the amortization schedule of the first six​ payments?

If you bought the​ car, what monthly interest rate would you be​ paying?

​(Round to four decimal​ places.)

Most advertising plans are evaluated on reaching quantifiable objectives, such as to Question

6 options: a) increase consumer awareness b) not exceed the media budget c) expand the advertising campaign d) decrease market research

2. Please calculate the following bond values, Yield to Maturity, current yield and capital gains.

1) Value of 10-year, 10% coupon, semiannual bond if rd = 13%.

2) Value of 10-year, 10% coupon, semiannual bond if rd = 7%.

3) Value of 10-year, 10% coupon, semiannual bond if rd = 10%.

4) YTM on a 10-year, 9% semi-annual coupon, $1,000 par value bond selling for $887

5) Current yield and capital gains for case

6) What is the relation between bond value and years remaining till maturity?

Assume that there is corporate tax but no other frictions. Based on the propositions of Modigliani and Miller, which statement is least accurate:

a. The optimal structure is 100%

b. The cost of equity increases as the leverage ratio increases

c. The cost of debt increases as leverage ratio increases

d. The weighted cost of capital decreases as the leverage ratio increases

e. Firm value increases as the firm takes on more debt

Problem 27-01 Lease or Buy [LO3] You work for a nuclear research laboratory that is contemplating leasing a diagnostic scanner (leasing is a very common practice with expensive, high-tech equipment). The scanner costs $5,300,000, and it would be depreciated straight-line to zero over four years. Because of radiation contamination, it actually will be completely valueless in four years. You can lease it for $1,550,000 per year for four years. Assume that the tax rate is 23 percent. You can borrow at 7 percent before taxes. What is the NAL of the lease? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Should you lease or buy?

4) The effective annual interest rate is 6%. A 30 year loan is repaid as follows (payments starting at the end of the first year):

For the first 10 years, interest only.

For the second 10 years, each payment is twice the interest due in that period.

For the final 10 years, level payments of X per year.

Find the outstanding balance at the end of each 10 year period, and find X. (Optional: do it without using a spreadsheet.)

What is the role of the required return on equity investments in stock valuation models?

Why would a crisis in the subprime mortgage market lead to declining prices in the U.S. equity markets?

3) Tian buys a car that costs $35,000.

a) He pays $5,000 down (i.e. immediately), and he pays off the rest of the loan with 26 bi-weekly payments per year of $250 for 5 years. What is the effective annual interest rate i?

b) Instead, he pays no money down but increases his monthly payments to $290, except for the last one which is exactly enough to pay off the loan. The interest rate is the same as in part a). Is the last payment a balloon or a drop payment? How much is it?

2.   The following data are taken from the sheet at the end of the current year:

Cash                                                                         543,000

Short-term Investments                                   826,000

Notes Payable, long-term                                235,000

Prepaid Insurance                                                 70,000

Accounts Payable                                               902,000

Accrued Liabilities                                               526,000

Inventory                                                          1,625,000

Accounts Receivable                                          117,000

Salaries Payable                                                  165,000

Intangible Assets                                                 500,000

Property, Plant and Equipment                1,800,000             

                                                          Computation          Interpretation—what does the result mean?

Compute:     a. Working capital:    ___________________   __________________________________

b. Current ratio:       ___________________   __________________________________

         c. Quick ratio:           ___________________   __________________________________

Is more regulation needed in order to reduce financial scandals? Explain