A firm is considering an investment in a new machine with a price of $18.06 million to replace its existing machine. The current machine has a book value of $6.06 million and a market value of $4.56 million. The new machine is expected to have a four-year life, and the old machine has four years left in which it can be used. If the firm replaces the old machine with the new machine, it expects to save $6.76 million in operating costs each year over the next four years. Both machines will have no salvage value in four years. If the firm purchases the new machine, it will also need an investment of $256,000 in net working capital. The required return on the investment is 11 percent and the tax rate is 35 percent.

What is the NPV of the decision to purchase a new machine? (Enter your answer in dollars, not millions of dollars. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 1,234,567.89.)
  
NPV           $

What is the IRR of the decision to purchase a new machine? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
  
IRR             %

What is the NPV of the decision to purchase the old machine? (A negative answer should be indicated by a minus sign. Enter your answer in dollars, not millions of dollars. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 1,234,567.89.)
  
NPV           $
  
What is the IRR of the decision to purchase the old machine? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16. A negative answer should be indicated by a minus sign.)

a. Steve and Jackson have $4,000 to deposit in a money market fund earning 5%. If they add $2,000 to that account annually, how much will they have accumulated in 15 years? (Show all work.)

b. Carey has $2,000 for a down payment on a vehicle and she can afford monthly payments of $400. She wants to finance a vehicle over no more than 4 years. If lenders are currently offering loans at 6 percent interest, what is the maximum price Judy can pay for a vehicle?

c. Pat would like to know the monthly payments and the total finance charges on the following 2 loans: (Show all work.)

A.. $30,000, 9%, 36 months
B. $30,000, 9%, 48 months

d. Your mortgage payment is $1,500 per month. Of this amount, insurance is $50, property taxes are $200, and interest is about $1,100. Assuming you have other itemized deductions that already exceed your standard deduction and that you are in the 31% marginal tax bracket, what is the reduction in your tax liability as a result of owning a home with this mortgage. (Show all work.)

"Bond Yields [LO2] West Corp. issued 25-year bonds two years ago at a coupon rate of 5.3 percent. The bonds make semiannual payments. If these bonds currently sell for 105 percent of par value, what is the YTM?"

A firm can lease a truck for 5 years at a cost of $45,000 annually. It can instead buy a truck at a cost of $95,000, with annual maintenance expenses of $25,000. The truck will be sold at the end of 5 years for $35,000. The cost of capital is 15%. What is the EAC of Purchase?

"Interest Rate Risk [LO2] Bond J has a coupon rate of 3 percent. Bond K has a coupon rate of 9 percent. Both bonds have 14 years to maturity, make semiannual payments, and have a YTM of 6 percent. If interest rates suddenly rise by 2 percent, what is the percentage price change of these bonds? What if rates suddenly fall by 2 percent instead? What does this problem tell you about the interest rate risk of lower-coupon bonds?"

Risk and Rates of Return: Security Market Line Risk and Rates of Return: Security Market Line The security market line (SML) is an equation that shows the relationship between risk as measured by beta and the required rates of return on individual securities. The SML equation is given below: ​ If a stock's expected return plots on or above the SML, then the stock's return is a)insufficient/sufficient? to compensate the investor for risk. If a stock's expected return plots below the SML, the stock's return is b)insufficient/sufficient? to compensate the investor for risk. The SML line can change due to expected inflation and risk aversion. If inflation changes, then the SML plotted on a graph will shift up or down parallel to the old SML. If risk aversion changes, then the SML plotted on a graph will rotate up or down becoming more or less steep if investors become more or less risk averse. A firm can influence market risk (hence its beta coefficient) through changes in the composition of its assets and through changes in the amount of debt it uses.

Quantitative Problem: You are given the following information for Wine and Cork Enterprises (WCE): rRF = 5%; rM = 7%; RPM = 2%, and beta = 1.2

What is WCE's required rate of return? Round your answer to 2 decimal places. Do not round intermediate calculations. %

If inflation increases by 2% but there is no change in investors' risk aversion, what is WCE's required rate of return now? Round your answer to two decimal places. Do not round intermediate calculations. % Assume now that there is no change in inflation, but risk aversion increases by 1%.

What is WCE's required rate of return now? Round your answer to two decimal places. Do not round intermediate calculations. %

If inflation increases by 2% and risk aversion increases by 1%, what is WCE's required rate of return now? Round your answer to two decimal places. Do not round intermediate calculations. %

You are evaluating two different milling machines to replace your current aging machine. Machine A costs $266,735, has a three-year life, and has pretax operating costs of $64,279 per year. Machine B costs $395,418, has a five-year life, and has pretax operating costs of $32,757 per year. For both milling machines, use straight-line depreciation to zero over the project’s life and assume a salvage value of $40,798. Your tax rate is 34 % and your discount rate is 10 %.

What is the EAC for Machine A? (Round answer to 2 decimal places. Do not round intermediate calculations)

You are evaluating two different milling machines to replace your current aging machine. Machine A costs $271,107, has a three-year life, and has pretax operating costs of $71,215 per year. Machine B costs $400,129, has a five-year life, and has pretax operating costs of $31,750 per year. For both milling machines, use straight-line depreciation to zero over the project’s life and assume a salvage value of $44,650. Your tax rate is 34 % and your discount rate is 10 %.

What is the EAC for Machine B? (Round answer to 2 decimal places. Do not round intermediate calculations).

Why does the Statement of Net Assets differentiate the restricted net assets from unrestricted net assets?

What can you say about NPV with respect to project valuation (As an alternative to IRR)? When are projects valuable as measured by NPV?

Part 2

Risk and return You are considering an investment in the stock market and have identified two potential stocks, they are Westpac Banking Corp. (ASX: WBC) and Singapore Airlines Ltd. (SGX: C6L). The historical prices for the past 10 years are shown in the table below

1. Which stocks would you prefer to own? Would everyone make the same choice? Explain your answer(s).

2. Calculate the correlation coefficient between the two stocks. Does it appear that a portfolio consisting of WBC and C6L would provide good diversification? Explain your answer(s).

3. Calculate the expected (annual) return if you owned a portfolio consisting of 50% in WBC and 50% in C6L. Would you prefer the portfolio to owning either of the stocks alone?

Renegade Industries is considering the purchase of a new machine for the production of latex. Machine A costs $3.14 million and will last for six years. Variable costs are 32% of sales, and fixed costs are $1,983,324 per year. Machine B costs $5.14 million and will last for nine years. Variable costs for this machine are 23% of sales and fixed costs are $1,402,381 per year. The sales for each machine will be $10 million per year. The required return is 9 %, and the tax rate is 38%. Both machines will be depreciated on a straight-line basis. The company plans to replace the machine when it wears out on a perpetual basis. Calculate the NPV for machine B. (Round answer to 2 decimal places. Do not round intermediate calculations)

1. Explain why you agree or disagree with the following statement: “All municipal bonds are exempt from federal income taxes.”

2. Explain why you agree or disagree with the following statement: “All municipal bonds are exempt from state and local taxes.”

3. What is the difference between a tax-backed bond and a revenue bond?