Consider an asset that costs $475,200 and is depreciated straight-line to zero over its 8-year tax life. The asset is to be used in a 5-year project; at the end of the project, the asset can be sold for $59,400.

Required : If the relevant tax rate is 31 percent, what is the aftertax cash flow from the sale of this asset?

A project has an unlevered NPV of $1.5 million. To finance the project, debt is being issued with associated flotation costs of $60,000. The flotation costs can be amortized over the project's 5-year life. The debt of $10 million is being issued at the market interest rate of 10 percent paid annually, with principal repaid in a lump sum at the end of the fifth year. If the firm's tax rate is 21 percent, calculate the project's APV.

David has a savings account with a 7,000 balance today. The account earns an annual percentage rate of interest of 2.25%, compounded monthly. David plans to make no other deposits or withdrawals. How many years will it take David's account balance to double?

The Metchosin Corporation has two different bonds currently outstanding. Bond M has a face value of $30,000 and matures in 20 years. The bond makes no payments for the first six years, then pays $3,100 every six months over the subsequent eight years, and finally pays $3,400 every six months over the last six years. Bond N also has a face value of $30,000 and a maturity of 20 years; it makes no coupon payments over the life of the bond. The required return on both these bonds is 12% compounded semiannually, what is the current price of bond M and bond N? (Do not round intermediate calculations. Round the final answers to 2 decimal places.)

You would like to buy a house that costs $350,000. You have $50,000 in cash that you can put down on the​ house, but you need to borrow the rest of the purchase price. The bank is offering a​ 30-year mortgage that requires annual payments and has an interest rate of 7% per year. You can afford to pay only $23,500 per year. The bank agrees to allow you to pay this amount each​ year, yet still borrow $300,000. At the end of the mortgage​ (in 30​ years), you must make a balloon​ payment; that​ is, you must repay the remaining balance on the mortgage. How much will this balloon payment​ be?

The PV of the annuity is (Round to the nearest​ dollar.)

The balloon payment is (Round to the nearest​ dollar.)

​$nothing .

​ (Round to the nearest​ dollar.)

Problem 11-20 Project Analysis [LO1, 2]

Problem 11-5 Sensitivity Analysis and Break-Even [LO1, 3]

Use the following information to answer questions 1-3.

Mitts Beverage Inc. manufactures and distributes fruit juice products. Mitts is considering the development of a new prune juice product. Mitts’ CFO has collected the following information regarding the proposed project:

· The company already owns a section of land where the facility could be built. The land is estimated to have a after tax market value of $1 million. The company plans to sell the land if it is not used for this project.

· The project will require that the company spend $1 million today (t = 0) to purchase a new machine. For tax purposes, the equipment will be depreciated on a straight-line basis. The company plans to use the machine for all 3 years of the project. At t = 3, the equipment is expected to have no salvage value.

· The project will require a $400,000 increase in inventory and $200,000 increase in accounts payable at t = 0. The cost of the net operating working capital will be fully recovered at t = 3.

· The project's incremental sales are expected to be $1 million a year for three years (t = 1, 2, and 3).

· The project’s annual operating costs (excluding depreciation) are expected to be 60% of sales.

· The company’s tax rate is 40%.

· The company’s interest expense each year will be $300,000.

· The project’s discount rate is 10%.

1. What is the initial investment for the project?

2. What is the annual expected incremental operating cash flow for years 1-3?

3. What is the project’s NPV?

C. In 1790 Benjamin Franklin left the equivalent of $4,600 (actually 1,000 British pounds)

each to the cities of Philadelphia and Boston. He stipulated that the money be invested

and that the principal not be touched for 100 years.

1. If the money had been invested at 4%, compounded yearly, how much would each city have had in 1890?  _____________________

2. How much if it had been invested at 5%, compounded yearly? __________________

D. A genie popped out of a bottle and offered you one of three choices:

1. $5,000 today.

2. $10,000 10 years from now.

3. a 12-year annuity, paying $1,000 a year starting at the end of this year.

Your required rate of return is 9%. Which alternative is worth more to you?_____________________

1. Reel Fast Charters, based in the Bahamas, runs multi-day fishing charters for wealthy anglers. They have been very successful in their first five years in operation and Brian (the owner) is considering adding a second boat. A new 80’ Viking would cost $5,000,000 with another $1,000,000 needed to upgrade the interior to a level that would attract the wealthy clients they desire. The boat would be depreciated straight-line over 15 years, but would be sold at the end of five years, for an estimated $5,000,000. The new boat would generate estimated additional revenue of $2,000,000 per year and would have associated expenses of $625,000. No additional working capital would be necessary. The firm’s tax rate is 30% and the required rate of return is 12%. Calculate the NPV and IRR. Should the new boat be purchased?

Give three reasons workers join unions. What three factors may cause workers to leave a union?