DEPRECIATION METHODS

Charlene is evaluating a capital budgeting project that should last for 4 years. The project requires $275,000 of equipment. She is unsure what depreciation method to use in her analysis, straight-line or the 3-year MACRS accelerated method. Under straight-line depreciation, the cost of the equipment would be depreciated evenly over its 4-year life (ignore the half-year convention for the straight-line method). The applicable MACRS depreciation rates are 33%, 45%, 15%, and 7%. The company's WACC is 11%, and its tax rate is 40%.

1. What would the depreciation expense be each year under each method? Round your answers to the nearest cent.

Year 1:

Year 2:

Year 3:

Year 4:

Which depreciation method would produce the higher NPV?
Straight-Line or MACRS?

How much higher would the NPV be under the preferred method? Round your answer to two decimal places. Do not round your intermediate calculations.

Caspian Sea Drinks is considering the production of a diet drink. The expansion of the plant and the purchase of the equipment necessary to produce the diet drink will cost $26.00 million. The plant and equipment will be depreciated over 10 years to a book value of $2.00 million, and sold for that amount in year 10. Net working capital will increase by $1.26 million at the beginning of the project and will be recovered at the end. The new diet drink will produce revenues of $8.80 million per year and cost $1.77 million per year over the 10-year life of the project. Marketing estimates 13.00% of the buyers of the diet drink will be people who will switch from the regular drink. The marginal tax rate is 33.00%. The WACC is 11.00%. Find the NPV (net present value).

Answer format: Currency: Round to: 2 decimal places.

PROBLEM The following costs are associated with three tomato-peeling machines being considered for use in a food canning plan. Machine A Machine B Machine C First cost $52,000 $67,000 $63,000 Annual Maintenance & Operating costs Annual increase starting in year 2 15,000 12,000 9,000 250 Annual benefit 38,000 37,000 31,000 Salvage value 13,000 22,000 19,000 Useful life, in years 4 12 6 If the canning company uses a MARR of 12%, which is the best alternative? Show your analysis using each of the following methods:

(a) Present worth

(b) Annual equivalence

(c) Rate of return

Please perform in excel and show the procedure.

Google has cash flows of $29.10, $36.93, and $45.03 billion for the next three years. After that Google’s cash flows is $47.51 billion and its cash flow will grow at 5.5% forever. The cost of capital is 10.20%. Google has 700 million shares outstanding. What is the price of Google stock today?

Consider the following data concerning four corporate bonds, all of which have a face value of $1,000 and have semiannual compounding:

Bond 1 2 3 4

YTM 8.0% 7.5% 8.5% 8.5%

Coupon Rate 8.0% 7.0% 9.0% 9.0%

Years until Maturity 5 10 10    20

Which of these bonds is currently priced at a discount?

E3.8. Pricing Multiples: General Mills, Inc. (Medium)
General Mills, the consumer foods company, traded at 1.6 times sales in 2011. It was
reporting a net profit margin on its sales of 10.4 percent. What was its P/E ratio?
E3.9. Measuring Value Added (Medium)
a. Buying a stock. A firm is expected to pay an annual dividend of $2 per share forever.
Investors require a return of 12 percent per year to compensate for the risk of not
receiving the expected dividends. The firm's shares trade for $19 each. What is the
value added by buying a share at $19?
b. An investment within a firm. The general manager of a soccer club is considering pay-
ing $2.5 million per year for five years for a "star" player, along with a $2 million up-
front signing bonus. He expects the player to enhance gate receipts and television
advertising revenues by $3.5 million per year with no added costs. The club requires a
9 percent return on its investments. What would be the value added from the acquisi-
tion of the player?

how do you check if there is a market for your product

Fey Fashions expects the following dividend pattern over the next seven​ years. The company will then have a constant dividend of ​$2.30 forever. What is the​ stock's price today if an investor wants to earn (table)

a)  What is the​ stock's price today if an investor wants to earn 14%

b)  What is the​ stock's price today if an investor wants to earn 22%

Assume that Camilles Jewelry Corp. recently paid an annual dividend of $2.00 per share (or D0) on its common stock. Because of exceptionally positive operating results, the firm expects dividends to grow at a supernormal growth rate of 20% (or Gs) over the next three years. After the end of the three year supernormal growth period, dividend growth is expected to return to the firms normal rate of 6% (or Gn). The investors required return for Camilles Jewelry Corp. common stock is 12% (or Ke). Using the two-stage growth model solve for the firm's current stock price (or P0)

Show all your work.

Olsen Outfitters Inc. believes that its optimal capital structure consists of 70% common equity and 30% debt, and its tax rate is 40%. Olsen must raise additional capital to fund its upcoming expansion. The firm will have $1 million of retained earnings with a cost of rs = 12%. New common stock in an amount up to $10 million would have a cost of re = 14%. Furthermore, Olsen can raise up to $3 million of debt at an interest rate of rd = 9% and an additional $4 million of debt at rd = 10%. The CFO estimates that a proposed expansion would require an investment of $8.5 million. What is the WACC for the last dollar raised to complete the expansion? Round your answer to two decimal places.

E.

You deposit $7,000 in an account in 4 years from today earning 5% APR. After 12 years from today, you

make another deposit into the same account.

Twenty-five years from today, the account balance is

$38,952.18. Assuming

quarterly

compounding, what was the amount of the deposit at the end of year 12? (8

points)

F.

You bought a house for 200,000. The bank required a 25% down payment and gave you a 30-year mortgage

loan for the remainder. Assume an annual interest rate of 5% and a monthly repayment schedule (9 points).

a.

What is the amount of the mortgage?

b.

What is your monthly payment?

c.

After 19 years of payments, how much do you still owe?

G.

You bought an expensive TV last year for $900 and charged it to your credit card that charged 22% APR. You

will be diligent in sending monthly payments in an amount that would retire the card balance in exactly 5

years. After 3 years of payments, you plan to refinance the then remaining balance to a new card that

charges an APR of 12%. After that 3 years, you can afford a higher monthly payment of $40. (9 points)

a.

What is the amount of the initial monthly payments?

b.

What is the balance that will get transferred to the new card after 3 years?

c.

How many months will it take to pay off the credit card balance with the

new $40 payment assuming no other purchases?

The treasurer of a Dutch company operating in Thailand considers a one-year bank loan of $350,000 (US) with an interest rate of 8.885% (dollar based). The current spot rate is B42.84/$ and a local loan in Thai Baht (B) would carry a rate of 14%. Expected inflation rates are 4.5% and 2.2% in Thailand and the United States, respectively, for the coming year. If Thailand devalues the baht by 5%, what is the effective cost of funds in Thai baht terms?

8.30%

9.00%

11.50%

12.50%

With $2,000,000 to invest, a spot rate of 71.635kr/$, a three-month forward rate of 72.9127kr/$, an expected spot of 70kr/$, a US$ three-month interest rate of 4.80%, and an Icelandic krona three-month interest rate of 12.020%, using uncovered interest arbitrage, can a position yield a return in excess of 4%?

No, it is not possible.

Yes, the yield is 4.21%

Yes, the yield is 4.80%

Yes, the yield is 5.41%