USE THE INFORMATION BELOW TO ANSWER THE FOLLOWING 4 QUESTIONS

Erma’s Beauty Supply is considering expanding the existing store. Erma wants to lease the office space next door to her business. Erma must spend, $120,000 on equipment to expand. The equipment is expected to have a zero-salvage value and will be retired in 8 years. Erma expects to increase networking capital by $8,000 right now if she goes through with the expansion. Erma spent $12,000 last month on a survey of the area surrounding the shop to see if there was sufficient demand for a larger store. Erma estimates she will increase revenues by $110,000 per year in the new store for eight years. The direct expenses incurred to make those sales are $78,000, including rent. The lease she is considering signing is for 8 years. She will liquidate the $8,000 networking capital when the lease is complete in 8 years. Erma’s Beauty Supply pays 40.0% in taxes and has a cost of capital of 9.0%.

38. How much does Erma need to expand her business at T=0?

39. Based on this information, the project’s operating cash flow in each of the first seven years is $_______?

40. Based on this information, the project’s terminal year (year 8) total cash flow is $_______?

41. What is Erma’s NPV if she decides to expand the business?

Video Concepts, Inc. (VCI) manufactures a line of videocassette recorders (VCRs) that are distributed to large retailers. The line consists of three models of VCRs. The following data are available regarding the models:

VCI is considering the addition of a fourth model to its line of VCRs:

• This model would be sold to retailers for $375.
• The variable cost of this unit is $225.
• The demand for the new Model LX4 is estimated to be 300 units per year.
• Sixty percent of these unit sales of the new model is expected to come from other models already being manufactured by VCI:
  • 20 percent from Model LX1
  • 30 percent from Model LX2
  • 50 percent from Model LX3.
• VCI will incur a fixed cost of $20,000 to add the new model to the line.

Answer the following:

• Based on the preceding data, should VCI add the new Model LX4 to its line of VCRs? Why?

Make sure you are responding to each part of every question. You do not have to show your work for each question, but I recommend it because partial credit will be given for completing the right steps even if your final answer is incorrect.

***Excel Spreadsheet***

Conch Republic Electronics is a midsized electronics manufacturer located in Key West, Florida. The company president is Shelley Couts, who inherited the company. Over the years, the company expanded into manufacturing and is now a reputable manufacturer of various electronic items. One of the major revenue-producing items manufactured by Conch Republic is a smart phone. Conch Republic currently has one smart phone model on the market, and sales have been excellent. Conch republic spent $750,000 to develop a prototype for a new smart phone that has all the features of their existing smart phones. The company has spent a further $200,000 for a marketing study to determine the expected sales figures for the new smart phone.

Conch republic can manufacture the new smart phones for $220 each in variable costs. Fixed costs for the operation are estimated to run $6.4 million per year. The estimated sales volume is 155,000, 165,000, 125,000, 95,000, and 75,000 per year for the next five years, respectively. The unit price of the new smart phone will be $535. The necessary equipment can be purchased for $43.5 million and will be depreciated on a seven-year MACRS schedule. It is believed the value of the equipment in five years will be $6.5 million.

As previously stated, Conch Republic currently manufactures a smartphone, production of the existing model is expected to be terminated in two years. If Conch Republic does not introduce the new smartphone, sales will be 95,000 units and 65,000 units for the next two years respectively. The price of the existing smart phone is $385 per unit; with variable cost of $145 and fixed costs of $4.3 million per year. If Conch Republic does introduce the new smartphone, sales of the existing smart phone will fall by 30,000 per unit, and the price of the existing units will have to be lowered to $215 each. Net working capital for the smart phones will be 20 percent of sales and will occur with the timing of the cash flows for the year (i.e., there is no initial outlay for NWC). Changes in NWC will thus first occur in Year 1 with the first year's sales. Conch republic has a 21 percent corporate tax rate and a required rate of 12 percent.

1. What is the payback period of the project?
2. What is the profitability index of the project?
3. What is the IRR of the project?
4. What is the NPV of the project?

You plan to get a mortgage which is an amortized loan. The mortgage is $350,000 for 15 years with APR of 3.5% compounding monthly. How much is the interest payment of the 8th month of the 8th year? How much is the balance after 12 years?

Lowes Inc. has 1,100 bonds outstanding that are selling for $992 each. The bonds carry a 6.0percent coupon, pay interest semi-annually, and mature in 7.5 years. The company also has 9,500 shares of 5% preferred stock at a market price of $40per share. This month, the company paid an annual dividend in the amount of $1.20per share. The dividend growth rate is 5.0percent.The common stock is priced at $30a share and there are 34,500 shares outstanding. The company is considering a project that is equally as risky as the overall company. This project has initial costs of $630,000 and operating cash flows of $80,000 a year for the next 10 yearsand salvage value of $20,000 at the end of 10 years.The net working capital (NWC) is expected to increase by $10,000 a year until the end of the project life. All the NWCs will be recovered when the project is completed. The project will be depreciated straight-line to zero over the project’s 10-year life. The tax rate is 21%.

1. What is Kirksville’s weighted average cost of capital?

2. What is the net present value (NPV) of this project?Should you accept the project? Explain why.

3. What is the internal rate of return (IRR) of this project? Should you accept the project if you apply the IRR decision rule?

Mr. Agirich of Aggie Farms is considering the purchase of 100 acres of prime ranch land that is adjacent the ranch he now owns. Mr. Agirich can operate the additional 100 acres with present labor, machinery and breeding livestock. The land is selling for $400 per acre.   Mr. Agirich believes that the operating receipts per acre of land per year will $450 and operating expenses will be $420 in present dollars. Mr. Agirich expects that the inflation rate will be 3% and operating receipts and expenses per acre will increase at the rate of inflation. The farmer will sell the land in three years and he anticipates that land prices will increase at the rate of inflation (from a base price of $400). A bank will loan him $350 per acre of land and the loan will be fully amortized over 15 years at 10% (annual payments). The outstanding balance of the loan will be paid at the end of the third year (balloon payment). Assume that the marginal tax rate is 30% and that Mr. Agirich requires at least a 6% pre-tax, risk-free return on capital and a 4% risk premium on projects of comparable risk. (Do the analysis on a per acre basis.)

            A.        Lay out the cash flows for the investment.

            B.        Calculate the net present value. [NPV=$6.12]

            C.        Layout the financing cash flows associated with this investment.

            D.        Is there a potential liquidity problem?

E.         What maximum price should Mr. Agirich be willing to pay for an acre of land?

                        F.         Calculate the net present value if the real net returns of $30.00 per acre and the real purchase price of land of $400 per acre are assumed to increase by 4% each year. Remember that you still need to adjust for inflation. Everything else is the same as before. [NPV=42.04]

You would like to invest $20,000 and have a portfolio expected return of 12 percent. You are considering two securities, X and Y. X has an expected return of 20 percent and Y has an expected return of 10 percent. How much should you invest in stock X if you invest the balance in stock Y to achieve the 12 percent portfolio return?

Macon Company is considering a new assembly line to replace the existing assembly line. The existing assembly line was installed 2 years ago at a cost of $90,000; it was being depreciated under the straight-line method. The existing assembly line is expected to have a usable life of 4 more years. The new assembly line costs $120,000; requires $8,000 in installation costs and $5,000 in training fees; it has a 4-year usable life and would be depreciated under the straight-line method. The new assembly line will increase output and thereby raises sales by $10,000 per year and will reduce production expenses by $5,000 per year. The existing assembly line can currently be sold for $15,000. To support the increased business resulting from installation of the new assembly line, accounts payable would increase by $5,000 and accounts receivable by $12,000. At the end of 4 years, the existing assembly line is expected to have a market value of $4,000; the new assembly line would be sold to net $15,000 before taxes. Finally, to install the new assembly line, the firm would have to borrow $80,000 at 10% interest from its local bank, resulting in additional interest payments of $8,000 per year. The firm pays 21% taxes and its shareholders require 10% return.

Show your work! do not use excel.

(A)     (6 points) What is the initial cash outlay for this replacement project?

(B)      (5 points) What is the operating cash flow of the project?

(C)      (5 points) What is the terminal cash flow of the project?

(D)     (4 points) Should you replace the existing assembly line? Provide all the details.

Tom starts investing $250 per month at age 20. Bob starts investing $250 per month at age 30. Both Tom and Bob are the same age and can each earn 8 percent on their invested funds. If both retire at age 60, how much more will Tom have in his retirement account compared to Bob?

A. $500,162

B. $600,162

C. $700.162

D. $400,162

Consider the following project being analyzed for possible investment at ABC Corp. Initial Cost –$50 Inflow Year 1 $15 Inflow Year 2 $15 Inflow Year 3 $20 Inflow Year 4 $10 Inflow Year 5 $10 All amounts are in millions. The required return for the project is 8%. The project’s profitability index is: (Enter your answer out to two decimal places. As an example, you would enter 1.50 as 1.50)

Consider the following project being analyzed for possible investment at ABC Corp.

Initial Cost                      –$50

Inflow Year 1                   $15

Inflow Year 2                   $15

Inflow Year 3                   $20

Inflow Year 4                   $10

Inflow Year 5                   $10

All amounts are in millions. The required return for the project is 8%.

The project’s NPV is:

(Enter your answer without a leading dollar sign out to two decimal places and in abbreviated millions. As an example, you would enter $2.42 million as 2.42.)

Consider the following project being analyzed for possible investment at ABC Corp. Initial Cost –$50 Inflow Year 1 $15 Inflow Year 2 $15 Inflow Year 3 $20 Inflow Year 4 $10 Inflow Year 5 $10 All amounts are in millions. The required return for the project is 8%. The project’s IRR is: (Enter your answer without a leading dollar sign out to four decimal places and in abbreviated millions. As an example, you would enter 5.42% as 0.0542.)

The date today is July 31st, 2019. Mary has $5000 and wants to invest for 3 years.

Option 1: Invest in a four-year security maturing on July 1st, 2023 has an interest rate of 8% per year

Option 2: Invest in a three year security maturing on July 31, 2022 has an interest rate of 6%, then on July 31, 2022, invest another two-year security maturing on July 31, 2023.

Based on the unbiased expectations theory, what should be the return of the one-year security beginning July 31, 2022 (at the end of the three year security) and maturing on July 2023 (at the start of the two-year security)?