P10-16 IRR: Mutually exclusive projects Bell Manufacturing is attempting to choose teh better of two mutually exclusive projects for expanding teh firm's warehouse capacity. The relevant cash flows for the projects are shown in the following table. The firm's cost of capitial is 15%.

a. Calculate the IRR to the nearest whole precent for each of the projects.

b. Assess the acceptability of each project on the basis of the IRRs found in part a.

c. Which project, on this basis, is preferred?

You must evaluate a proposal to buy a new milling machine. The base price is $125,000, and shipping and installation costs would add another $17,000. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $81,250. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The machine would require a $6,000 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 $40,000 per year. The marginal tax rate is 35%, and the WACC is 12%. Also, the firm spent $5,000 last year investigating the feasibility of using the machine.

1. How should the $5,000 spent last year be handled?
   1. Last year's expenditure is considered as an opportunity cost and does not represent an incremental cash flow. Hence, it should not be included in the analysis.
   2. Last year's expenditure is considered as a sunk cost and does not represent an incremental cash flow. Hence, it should not be included in the analysis.
   3. The cost of research is an incremental cash flow and should be included in the analysis.
   4. Only the tax effect of the research expenses should be included in the analysis.
   5. 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.
   
   -Select-IIIIIIIVVItem 1

2. What is the initial investment outlay for the machine for capital budgeting purposes, that is, what is the Year 0 project cash flow? Round your answer to the nearest cent.
   $

3. What are the project's annual cash flows during Years 1, 2, and 3? Round your answer to the nearest cent. Do not round your intermediate calculations.

   Year 1 $

   Year 2 $

   Year 3 $

4. Should the machine be purchased?
   -Select-YesNoItem 6

You must evaluate the purchase of a proposed spectrometer for the R&D department. The base price is $250,000, and it would cost another $37,500 to modify the equipment for special use by the firm. The equipment falls into the MACRS 3-year class and would be sold after 3 years for $62,500. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The equipment would require a $6,000 increase in net operating working capital (spare parts inventory). The project would have no effect on revenues, but it should save the firm $37,000 per year in before-tax labor costs. The firm's marginal federal-plus-state tax rate is 40%.

1. What is the initial investment outlay for the spectrometer, that is, what is the Year 0 project cash flow? Round your answer to the nearest cent. Negative amount should be indicated by a minus sign.
   $

2. What are the project's annual cash flows in Years 1, 2, and 3? Round your answers to the nearest cent.

   In Year 1 $

   In Year 2 $

   In Year 3 $

3. If the WACC is 14%, should the spectrometer be purchased?
   -Select-YesNo

Complete the following table. Given the premium, strike price and futures price, is the futures contract in or out of the money? How much is the intrinsic value? How much is the time value? Please show your work.

How would you use financial management to support innovation?  

What are some of the obstacles to innovation that you have encountered? How do you propose to resolve these challenges?

our boss believes the company's power plant is producing too much air pollution on a typical island. Your boss gives you three choices for dealing with this problem because he/she does not want to deal with it:

1. You can pay a pollution tax (Carbon Offsets) one time of $13,000,000 immediately.  
2. You can close the plant and install a power cable from the mainland to the Island. That will cost you $1,000,000 at the end of this year, $3,000,000 at the end of next year and then $750,000 forever for maintenance.  
3. You can retrofit the plant with scrubbers to reduce the emissions to make the plant green. That will cost $7.5m at the end of this year and $100,000 for 50-years for maintenance.  

   Assume that the cost of generating power on the mainland is approximately the same as the cost of generating power at the Island's plant. Assume, this comes as a surprise to you and you, have not saved any money in reserves, and you need to raise capital. Additional information is that market has a 12 percent market risk premium on the power plant with the risk-free rate being 5 percent with a company tax rate of 35 percent.  

   Current total raised capital at the power plant:  (This will help you calculate the WACC)

4. Debt – 7,000 outstanding bonds, at 7.5% coupon and 20 years to maturity. These bonds pay interest semiannually and quoted a price of 108 percent of par.  
5. Common Stock -180,000 shares outstanding, selling for $50 per share: Beta .90.
6. Preferred Stock – 8,000 shares of 5.5 percent preferred stock outstanding, currently selling for $95.00 per share.

Please answer in essay format and provide your Excel document showing all your calculation in appendixes choose the best option for Island. Support your answer with your calculations

From 1999 to 2017, the average IPO rose by 19.2% in its first day of trading. In 2000, 115 deals doubled in price on the first day. What factors might contribute to the huge 1st-day returns on IPOs? Some critics of the current IPO system claim that underwriters may knowingly underprice an issue. Why might they do this? Why might issuing companies accept lower IPO prices? What impact do institutional investors have on IPO pricing?

Rico works for Street Tacos Inc. The basis for Rico’s contribution under the Federal Insurance Contribution Act to help pay for benefits that will partially make up for his loss of income on retirement is

Equipment Company holds a lien on Fertile Farm’s equipment. The equipment can be sold to satisfy the debt

Erin indicates that she is acting as an agent on behalf of an unidentified client—Flight Services Inc.—when she enters into a contract with Go Airlines. Liability to Go for nonperformance of the contract may be imposed on

Investment Corporation wants to monitor business communications on phones that the employer provides to the employees. The employer’s best course of action to avoid liability under laws related to employee monitoring is to inform

Ben manages a warehouse and its inventory for Coffee Roaster Inc. To operate this part of the business, Ben’s authority can be inferred

Here are five easy rules for creating a simple cash flow plan:

Project monthly sales (and curb your optimism).

Remember receivables

Consolidate predictable.

Adjust for growth

Plan for the unforeseen

Successful long and short term financial planning, including cash flow planning, for corporations is very important. Apply the five easy rules and long and short term financial planning, including cash flow planning to personal financial planning. How can you utilize the above to improve your personal financial health?

NEW PROJECT ANALYSIS

You must evaluate a proposal to buy a new milling machine. The base price is $112,000, and shipping and installation costs would add another $10,000. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $72,800. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The machine would require a $3,000 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 $38,000 per year. The marginal tax rate is 35%, and the WACC is 10%. Also, the firm spent $5,000 last year investigating the feasibility of using the machine.

1. How should the $5,000 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 as 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 as 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.

b. What is the initial investment outlay for the machine for capital budgeting purposes, that is, what is the Year 0 project cash flow? Round your answer to the nearest cent.
$

c. What are the project's annual cash flows during Years 1, 2, and 3? Round your answer to the nearest cent. Do not round your intermediate calculations.

Year 1 $

Year 2 $

Year 3 $

d. Should the machine be purchased?

How are cash flows for a project estimated?

NEW PROJECT ANALYSIS

You must evaluate the purchase of a proposed spectrometer for the R&D department. The base price is $260,000, and it would cost another $39,000 to modify the equipment for special use by the firm. The equipment falls into the MACRS 3-year class and would be sold after 3 years for $91,000. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The equipment would require a $6,000 increase in net operating working capital (spare parts inventory). The project would have no effect on revenues, but it should save the firm $46,000 per year in before-tax labor costs. The firm's marginal federal-plus-state tax rate is 40%.

1. What is the initial investment outlay for the spectrometer, that is, what is the Year 0 project cash flow? Round your answer to the nearest cent. Negative amount should be indicated by a minus sign.
   $

2. What are the project's annual cash flows in Years 1, 2, and 3? Round your answers to the nearest cent.

   In Year 1 $

   In Year 2 $

   In Year 3 $

3. If the WACC is 10%, should the spectrometer be purchased?