Question
In: Finance
A 5-year project requires equipment that costs $100,000. If undertaken, the shareholders will contribute $40,000 cash...
A 5-year project requires equipment that costs $100,000. If undertaken, the shareholders will contribute $40,000 cash and borrow $60,000 at 7% with an interest-only loan with a maturity of 5 years and annual interest payments. The equipment will be depreciated straight-line to zero over the 5-year life of the project. There will be a pre-tax salvage value of $10,000. There are no other start-up costs at year 0. During years 1 through 5, the firm will sell 50,000 units of product at $5; variable costs are $3; there are no fixed costs. The cost of unlevered equity is 14%, the tax rate is 40% and the risk-free rate is 2%. What is the NPV of the project using the WACC and APV methodologies?
Calculate the cost of capital of the firm
Select one:
a. 9.64%
b. 10.64%
c. 11.64%
d. 12.64%
Solutions
page 1
page 2
page 3
page 4
jeff jeffy answered 1 year agoRelated Solutions
Tank Co. is evaluating a project that costs $100,000 and has a 5-year life. Assume that...
Tank Co. is evaluating a project that costs $100,000 and has a
5-year life. Assume that depreciation is prime-cost to zero salvage
value over the 5-years, and the equipment can be sold for $6,000 at
the end of year 5. The average discount rate for such a project is
10 per cent on such projects. The individual tax rate is 15 per
cent and the corporate tax rate is 30 per cent. It is projected
that they will sell 12000...
A project requires an initial investment of $100,000 and is expected to produce a cash inflow...
A project requires an initial investment of $100,000 and is
expected to produce a cash inflow before tax of $27,300 per year
for five years. Company A has substantial accumulated tax losses
and is unlikely to pay taxes in the foreseeable future. Company B
pays corporate taxes at a rate of 21% and can claim 100% bonus
depreciation on the investment. Suppose the opportunity cost of
capital is 10%. Ignore inflation.
a. Calculate project NPV for each company.
(Do not...
A project requires an initial investment of $100,000 and is expected to produce a cash inflow...
A project requires an initial investment of $100,000 and is
expected to produce a cash inflow before tax of $27,800 per year
for five years. Company A has substantial accumulated tax losses
and is unlikely to pay taxes in the foreseeable future. Company B
pays corporate taxes at a rate of 21% and can claim 100% bonus
depreciation on the investment. Suppose the opportunity cost of
capital is 11%. Ignore inflation.
A.Calculate project NPV for each company. (Do not round...
A project requires an initial investment of $100,000 and is expected to produce a cash inflow...
A project requires an initial investment of $100,000 and is
expected to produce a cash inflow before tax of $26,200 per year
for five years. Company A has substantial accumulated tax losses
and is unlikely to pay taxes in the foreseeable future. Company B
pays corporate taxes at a rate of 30% and can depreciate the
investment for tax purposes using the five-year MACRS tax
depreciation schedule. Suppose the opportunity cost of capital is
8%. Ignore inflation.
a. Calculate project...
A project requires an initial investment of $100,000 and is expected to produce a cash inflow...
A project requires an initial investment of $100,000 and is
expected to produce a cash inflow before tax of $26,600 per year
for five years. Company A has substantial accumulated tax losses
and is unlikely to pay taxes in the foreseeable future. Company B
pays corporate taxes at a rate of 21% and can claim 100% bonus
depreciation on the investment. Suppose the opportunity cost of
capital is 9%. Ignore inflation. Calculate the NPV for each
company. What is the...
A project requires an initial investment of $100,000 and is expected to produce a cash inflow...
A project requires an initial investment of $100,000 and is
expected to produce a cash inflow before tax of $27,700 per year
for five years. Company A has substantial accumulated tax losses
and is unlikely to pay taxes in the foreseeable future. Company B
pays corporate taxes at a rate of 21% and can claim 100% bonus
depreciation on the investment. Suppose the opportunity cost of
capital is 11%. Ignore inflation.
a. Calculate project NPV for each company. (Do not...
A project requires an initial investment of $100,000 and is expected to produce a cash inflow...
A project requires an initial investment of $100,000 and is
expected to produce a cash inflow before tax of $27,300 per year
for five years. Company A has substantial accumulated tax losses
and is unlikely to pay taxes in the foreseeable future. Company B
pays corporate taxes at a rate of 40% and can depreciate the
investment for tax purposes using the five-year MACRS tax
depreciation schedule. Suppose the opportunity cost of capital is
10%. Ignore inflation.
a. Calculate project...
A project requires an initial investment of $100,000 and is expected to produce a cash inflow...
A project requires an initial investment of $100,000 and is
expected to produce a cash inflow before tax of $27,300 per year
for five years. Company A has substantial accumulated tax losses
and is unlikely to pay taxes in the foreseeable future. Company B
pays corporate taxes at a rate of 40% and can depreciate the
investment for tax purposes using the five-year MACRS tax
depreciation schedule. Suppose the opportunity cost of capital is
10%. Ignore inflation.
a. Calculate project...
A project requires an initial investment of $100,000 and is expected to produce a cash inflow...
A project requires an initial investment of $100,000 and is
expected to produce a cash inflow before tax of $28,000 per year
for five years. Company A has substantial accumulated tax losses
and is unlikely to pay taxes in the foreseeable future. Company B
pays corporate taxes at a rate of 21% and can claim 100% bonus
depreciation on the investment. Suppose the opportunity cost of
capital is 11%. Ignore inflation & do not rely
on MACRS.
a. Calculate project...
Assume the following: Cash, $100,000; Accounts Receivable, $50,000; Accounts Payable, $50,000; Supplies, $40,000; Equipment, $100,000; Land,...
Assume the following: Cash, $100,000; Accounts Receivable, $50,000;
Accounts Payable, $50,000; Supplies, $40,000; Equipment, $100,000;
Land, $500,000; Bonds Payable, $1,000,000; Mortgage Payable,
$400,000; Inventory, $100,000. Compute both the current and quick
ratios. What conclusions can you draw from this data ?
ADVERTISEMENT
ADVERTISEMENT
Latest Questions
- Chapter 3 Homework You are considering an investment in the common stock of Target (Ticker: TGT)....
- Let gcd(a, p) = 1 with p a prime. Show that if a has at least...
- Imagine a student measures the concentration of a bacterial culture using the "direct microscopic method" (using...
- Stock C is expected to pay a dividend of $5.80 next year. Thereafter, dividend growth is...
- Why is a home a good inflation hedge? Should a home be included as an asset...
- How do you think Coronavirus will change society? (Public Health)
- The Sendai Co., Ltd., of Japan has budgeted costs in its various departments as follows for...
ADVERTISEMENT