Assume that I can borrow money at a rate of 10% per year, but that I only earn 2% per year on money I loan. A friend has recently offered me an investment opportunity; make a $5,000 investment today and receive a guaranteed $5,400 in one year. I currently have $10,000 in the bank, but I plan on consuming $9,000 – meaning that I only have $1,000 that I could invest. Can/should make the investment? How much consumption would I need to be willing to forego to make the investment? (Another way to think about this is what is the maximum amount that I would be willing to borrow to take the investment?)

The newly elected president Susan implements some policies with the intention of boosting income. She succeeds at her goal, since households experience an increase in their incomes. Firms, however, become more cautious about the future of the policies. They think that the policies are only temporal and expect economic conditions to worsen in the future.

a. What is the effect on interest rates of such policies?

b. What is the effect on the number of loans?

Joe Dokes retired today with $1,000,000 in his retirement nest egg.   If he followed a cash flow matching immunization strategy using zero coupon treasuries (STRIPS, CATS, or the like), for how many years could he take out $100,000 given the following yields on zero coupons, an approximation of their levels on 8/16/19?   What would you advise Mr. Dokes to do in order to prolong the life of his nest egg?

XYZ Company is considering purchasing a piece of equipment costing $400,000. It has a useful life of 4years and will be depreciated straight-line to zero, after which it will be scrapped for $30,000. This piece of equipment will save $150,000 per year in pretax operating costs during its useful life but requires an initial investment in NWC of $36,000. XYZ Company has a 21% tax rate and a required rate of return of 12%

What is the annual Operating Cash Flow (OCF) of this piece of equipment in Years 1-4?

What is the Year 4IATCF (Income After-Tax Cash Flow)?

What is the NPV of purchasing this piece of equipment?

Should XYZ Company take on this project?

What is the project's EAC?

Five years ago, Miguel invested a stock with price $35 per share. The stock price at the end of every year is as the following. Assumes no dividends paid during these years. Year Price 0 35 1 37 2 36 3 40 4 42 5 45 a) What was Migule’s holding period return on this stock for last five years? b) What was Migule’s annual internal rate of return? c) What was the standard deviation of returns of Migule’s investment?

Woodbridge Manufacturing case in Appendix E, and use the three primary project evaluation methods (NPV, IRR and Payback) to determine the acceptability of this capital expenditure project. The cost of the new equipment to build a new product, including shipping and installation, (the initial investment outlay) is $100,000. The net additional receivables and inventory needed to support sales of the new project of $12,979 is scheduled to be incurred during year 1. (Side note: This is a little unusual. Generally these costs are incurred at time 0.) The new product is expected to have a five year life, and during that time the sum of the additional gross margin over and above what the previous product earned, plus the tax savings from the greater depreciation (the supplemental annual cash flows) amounts to $38,875 each year. In addition, the $14,469 in additional receivables and inventory (included in the net $12,979 year 1 investment outlay) will be recovered at the end of year 5 (the terminal value). (Second side note: You may ask, how can they recover more in receivables and inventory than they invested in the first place? The answer is the original amount is the net between what was invested for this new project ($14,469) and what had been already invested in the prior project ($1, 940)). In this case there was no salvage value on the machine that was used for the project, but if there were, the net after-tax cash flow from the salvage value would also be included in the terminal value. The Treasury Department at your company tells you the appropriate weighted average cost of capital (the discount rate) is 10% for this type of project. Calculate the NPV and state whether, from a financial standpoint, this project would be acceptable based on the NPV criteria. Calculate the IRR and Payback. What do these methods indicate as far as the acceptability of the project?

1) The marketing manager feels the total supplemental annual cash flows over the five years of the project were good at $194,375, but felt the adoption rate would likely be much faster, resulting in a cash flow profile of $38,875 in year 1, $77,750 in year 2, $38,875 in year 3, $29,200 in year 4 and $9,675 in year 5. How do these changes affect the project evaluation measures and acceptability?

The controller feels that the adoption rate would likely be much slower, resulting in a cash flow profile of $9,675 in year 1, $29,200 in year 2, $38,875 in year 3, $77,750 in year 4 and $38,875 in year 5. How do these changes affect the project evaluation measures and acceptability?

The company Treasury Department decides that the discount rate should be increased to 15%, based on a closer evaluation of the risks of the project. Going back to the original cash flow profile, what affect does this change have on the project return and its acceptability?

From these examples, sum up what you have learned about the NPV project evaluation method. What general rules can you draw from these calculations and results?

Woo Audio is a small company in New York that makes high-quality headphone amplifiers. The company makes each amplifier by hand using premium audio components and vacuum tubes. Recently, the owner of the company noticed a trend in the headphone community toward using portable, high-quality headphone amplifiers. These new units combine a digital-to-analog converter with a high-power amplifier in a package small enough to put in a pocket.

Review the three-phase, eight-stage, new product development process:

• Phase I: Generating and Screening Ideas
  Stage 1: Generating New Product Ideas
  Stage 2: Screening Product Ideas
  Stage 3: Concept Development and Testing
• Phase II: Developing New Products
  Stage 4: Business Case Analysis
  Stage 5: Technical and Marketing Development
• Phase III: Commercializing New Product
  Stage 6: Test Marketing and Validation
  Stage 7: Launch
  Stage 8: Evaluation

Select one of the phases and explain how Woo Audio would proceed through that phase to develop a conceptual new product that will generate excitement in the headphone community.

please discrete the difference between capital planning and capital budgeting.

You currently have $55,000 in your retirement account.  You will make deposits of $11,000/year into your account for the next 20 years.  If the account earns 8% compounded quarterly, calculate how much you have in your account when you retire in 20 years.

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 $3 million of retained earnings with a cost of r_s = 13%. New common stock in an amount up to $10 million would have a cost of r_e = 16%. Furthermore, Olsen can raise up to $2 million of debt at an interest rate of r_d = 10% and an additional $6 million of debt at r_d = 11%. The CFO estimates that a proposed expansion would require an investment of $6.4 million. What is the WACC for the last dollar raised to complete the expansion? Round your answer to two decimal places.

If one calculated a standard deviation of 18.38% for a security with an expected return of 9.19%, how would one explain the importance and message of these statistical moments to an political science major? What does skew and kurtosis add, if anything, to the distribution discussion?

Consider the following abbreviated financial statements for Weston Enterprises: (Do not round intermediate calculations.) WESTON ENTERPRISES 2014 and 2015 Partial Balance Sheets Assets Liabilities and Owners’ Equity 2014 2015 2014 2015 Current assets $ 926 $ 1,007 Current liabilities $ 370 $ 416 Net fixed assets 3,947 4,560 Long-term debt 2,009 2,147 WESTON ENTERPRISES 2015 Income Statement Sales $ 11,390 Costs 5,570 Depreciation 1,050 Interest paid 150 a. What is owners' equity for 2014 and 2015? Owners' equity 2014 $ Owners' equity 2015 $ b. What is the change in net working capital for 2015? Change in NWC $ c-1. In 2015, the company purchased $1,825 in new fixed assets. How much in fixed assets did the company sell? Fixed assets sold $ c-2. In 2015, what is the cash flow from assets for the year? (The tax rate is 35 percent.) Cash flow from assets $ d-1. During 2015, the company raised $370 in new long-term debt. How much long-term debt must the company have paid off during the year? Debt retired $ d-2. What is the cash flow to creditors? Cash flow to creditors $

Problem 11-06
New-Project Analysis

The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $1,050,000, and it would cost another $16,500 to install it. The machine falls into the MACRS 3-year class (the applicable MACRS depreciation rates are 33.33%, 44.45%, 14.81%, and 7.41%), and it would be sold after 3 years for $666,000. The machine would require an increase in net working capital (inventory) of $8,500. The sprayer would not change revenues, but it is expected to save the firm $368,000 per year in before-tax operating costs, mainly labor. Campbell's marginal tax rate is 35%.

1. What is the Year 0 net cash flow?
   $
2. 
   
3. 
   
4. 
   
5. What are the net operating cash flows in Years 1, 2, and 3? Do not round intermediate calculations. Round your answers to the nearest dollar.

   Year 1	$
   Year 2	$
   Year 3	$

6. 
   
7. What is the additional Year 3 cash flow (i.e, the after-tax salvage and the return of working capital)? Do not round intermediate calculations. Round your answer to the nearest dollar.
   $
8. 
   
9. 
   
10. 
    
11. If the project's cost of capital is 14 %, what is the NPV of the project? Do not round intermediate calculations. Round your answer to the nearest dollar.
    $
    
    Should the machine be purchased?