1. Assume Joker Company uses a periodic inventory system. Calculate cost of goods sold and ending inventory using (1) FIFO, (2) LIFO and (3) average cost. Round per unit cost to two decimal places.

2. Assume Joker Company uses a perpetual inventory system. Calculate cost of goods sold and ending inventory using (1) FIFO, (2) LIFO and (3) average cost. Round per unit cost to two decimal places.

You and your team are financial consultants who have been hired by a large, publicly-traded electronics firm, Brilliant Electronics (BI), a leader in its industry. The company is looking into manufacturing its new product, a machine using sophisticated state of the art technology developed by BI’s R&D team, overseas. This overseas project will last for five years. They’ve asked you to evaluate this project and to make a recommendation about whether or not the company should pursue it. BI’s management team needs your recommendation and the analysis used to arrive at it by no later than December 3, 2019.

The following market data on BI’s securities are current:

Debt: 210,000 6.4 percent coupon bonds outstanding, 25 years to maturity, selling or 108 percent of par; the bonds have $1000 par value each and make semi-annual payments

Common Stock: 8,300,000 shares outstanding, selling for $68 per share; beta=1.1

Preferred Stock: 450,000 shares of 4.5% preferred stock outstanding, selling or $81 per share

Market: 7 percent expected market risk premium; 3.5 percent risk-free rate

The company bought some land three years ago for $3.9 million in anticipation of using it as a toxic dump site for waste chemicals, but it built a piping system to safely discard the chemicals instead. The land was appraised last week for $4.4 million on an after-tax basis.   In five years, the after-tax value of the land will be $4.8 million, but the company expects to keep the land for a future project. The company wants to build its new manufacturing plant on this land; the plant will cost $37 million to build.

At the end of the project (the end of year 5), the plant can be scrapped for $5.1 million. The manufacturing plant will be depreciated using the straight-line method.

The company will incur $6,700,000 in annual fixed costs excluding depreciation. The plan is to manufacture 15,300 machines per year and sell them at $11,450 per machine; the variable production costs are $9,500 per machine. Selling price and costs are expected to remain unchanged over the life of the project.

BI uses PK Global (PKG) as its lead underwriter. PKG charges BI spreads of 8% on new common stock issues, 6% on new preferred stock issues, and 4% on new debt issues. PKG has included all direct and indirect issuance costs (along with its profit) in setting these spreads. BI’s tax rate is 35 percent. The project requires $1,300,000 in initial net working capital investment to get operational. Assume BI raises all equity for new projects externally (that is, BI does not use retained earnings).

The weighted average flotation cost is the sum of the weight of each source of funds in the capital structure of the company times the flotation costs, so:

f_T = ($564.4/$827.65)(0.08) + ($36.45/$827.65)(0.06) + ($226.8/$827.65)(0.04) = 0.0682, or 6.82%

Thus the initial investment is increased by the amount of flotation costs:

                  (Amount raised)(1 – 0.0682) = $37,000,000   

                  Amount raised = $37,000,000/(1 – 0.0682) = $39,708,092

1. Calculate the firm’s current cost of capital using the information provided.

2. Calculate the project’s cost of capital (the appropriate discount rate to use to evaluate BI’s new project) assuming the capital structure will remain the same if the project is undertaken.

This project is somewhat riskier than a typical project for BI; therefore, management has asked you to use an adjustment factor of 12% to account for this increased riskiness (that is, to add 12% to the firm’s cost of capital) to estimate the project’s required rate of return.

(NOTE: Flotation costs do not have to be considered when calculating the required rate of return for each class of security – they are addressed in this problem by adjusting the cost of the initial investment to $39,708,092 from $37,000,000).

3. Calculate the project’s annual cash flows, taking into account all the relevant cash flows.

   1. Calculate the project’s initial Time 0 cash flow, taking into account all relevant cash flows.

   2. Calculate the project’s annual operational cash flows (OCF) over the life of the project.

   3. Calculate the project’s terminal (last year of the project) cash flow. Include all relevant cash flows.

(Note: You can present the cash flows from Year 0 to Year 5 in a table format)

4. What is the NPV and IRR of the project?

An electric utility is considering a new power plant in northern Arizona. Power from the plant would be sold in the Phoenix area, where it is badly needed. Because the firm has received a permit, the plant would be legal; but it would cause some air pollution. The company could spend an additional $40 million at Year 0 to mitigate the environmental problem, but it would not be required to do so. The plant without mitigation would cost $269.63 million, and the expected cash inflows would be $90 million per year for 5 years. If the firm does invest in mitigation, the annual inflows would be $92.94 million. Unemployment in the area where the plant would be built is high, and the plant would provide about 350 good jobs. The risk adjusted WACC is 16%.

1. Calculate the NPV and IRR with mitigation. Round your answers to two decimal places. Enter your answer for NPV in millions. Do not round your intermediate calculations. For example, an answer of $10,550,000 should be entered as 10.55. Negative value should be indicated by a minus sign.
   NPV $   million
   IRR  %

   Calculate the NPV and IRR without mitigation. Round your answers to two decimal places. Enter your answer for NPV in millions. Do not round your intermediate calculations. For example, an answer of $10,550,000 should be entered as 10.55.
   NPV $   million
   IRR  %

2. How should the environmental effects be dealt with when evaluating this project?
   1. If the utility mitigates for the environmental effects, the project is not acceptable. However, before the company chooses to do the project without mitigation, it needs to make sure that any costs of "ill will" for not mitigating for the environmental effects have been considered in the original analysis.
   2. The environmental effects should be treated as a remote possibility and should only be considered at the time in which they actually occur.
   3. The environmental effects if not mitigated would result in additional cash flows. Therefore, since the plant is legal without mitigation, there are no benefits to performing a "no mitigation" analysis.
   4. The environmental effects should be ignored since the plant is legal without mitigation.
   5. The environmental effects should be treated as a sunk cost and therefore ignored.
3. Should this project be undertaken?
   1. The project should be undertaken since the IRR is positive under both the "mitigation" and "no mitigation" assumptions.
   2. The project should be undertaken since the NPV is positive under both the "mitigation" and "no mitigation" assumptions.
   3. Even when no mitigation is considered the project has a negative NPV, so it should not be undertaken.
   4. The project should be undertaken only if they do not mitigate for the environmental effects. However, they want to make sure that they've done the analysis properly due to any "ill will" and additional "costs" that might result from undertaking the project without concern for the environmental impacts.
   5. The project should be undertaken only under the "mitigation" assumption.

CAPITAL BUDGETING CRITERIA: ETHICAL CONSIDERATIONS

An electric utility is considering a new power plant in northern Arizona. Power from the plant would be sold in the Phoenix area, where it is badly needed. Because the firm has received a permit, the plant would be legal; but it would cause some air pollution. The company could spend an additional $40 million at Year 0 to mitigate the environmental problem, but it would not be required to do so. The plant without mitigation would cost $270.34 million, and the expected cash inflows would be $90 million per year for 5 years. If the firm does invest in mitigation, the annual inflows would be $93.63 million. Unemployment in the area where the plant would be built is high, and the plant would provide about 350 good jobs. The risk adjusted WACC is 19%.

A. Calculate the NPV and IRR with mitigation. Round your answers to two decimal places. Enter your answer for NPV in millions. Do not round your intermediate calculations. For example, an answer of $10,550,000 should be entered as 10.55. Negative value should be indicated by a minus sign.
NPV $   million
IRR  %

Calculate the NPV and IRR without mitigation. Round your answers to two decimal places. Enter your answer for NPV in millions. Do not round your intermediate calculations. For example, an answer of $10,550,000 should be entered as 10.55.
NPV $   million
IRR  %

B. How should the environmental effects be dealt with when evaluating this project?

I. The environmental effects should be treated as a remote possibility and should only be considered at the time in which they actually occur.

II. The environmental effects if not mitigated would result in additional cash flows. Therefore, since the plant is legal without mitigation, there are no benefits to performing a "no mitigation" analysis.

III. The environmental effects should be ignored since the plant is legal without mitigation.

IV. The environmental effects should be treated as a sunk cost and therefore ignored.

V. If the utility mitigates for the environmental effects, the project is not acceptable. However, before the company chooses to do the project without mitigation, it needs to make sure that any costs of "ill will" for not mitigating for the environmental effects have been considered in the original analysis.

Should this project be undertaken?

I. The project should be undertaken only if they do not mitigate for the environmental effects. However, they want to make sure that they've done the analysis properly due to any "ill will" and additional "costs" that might result from undertaking the project without concern for the environmental impacts.

II. The project should be undertaken only under the "mitigation" assumption.

III. The project should be undertaken since the IRR is positive under both the "mitigation" and "no mitigation" assumptions.

IV. The project should be undertaken since the NPV is positive under both the "mitigation" and "no mitigation" assumptions.

V. Even when no mitigation is considered the project has a negative NPV, so it should not be undertaken.

(Capital Budgeting Criteria: Ethical Considerations)

An electric utility is considering a new power plant in northern Arizona. Power from the plant would be sold in the Phoenix area, where it is badly needed. Because the firm has received a permit, the plant would be legal; but it would cause some air pollution. The company could spend an additional $40 million at Year 0 to mitigate the environmental problem, but it would not be required to do so. The plant without mitigation would cost $209.90 million, and the expected cash inflows would be $70 million per year for 5 years. If the firm does invest in mitigation, the annual inflows would be $76.14 million. Unemployment in the area where the plant would be built is high, and the plant would provide about 350 good jobs. The risk adjusted WACC is 16%.

1. Calculate the NPV and IRR with mitigation. Enter your answer for NPV in millions. For example, an answer of $10,550,000 should be entered as 10.55. Negative values, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to two decimal places.
   NPV: $ _________million
   IRR: _____________ %

   Calculate the NPV and IRR without mitigation. Enter your answer for NPV in millions. For example, an answer of $10,550,000 should be entered as 10.55. Negative values, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to two decimal places.
   NPV: $ ________million
   IRR: __________%

2. How should the environmental effects be dealt with when evaluating this project?
   1. The environmental effects should be treated as a sunk cost and therefore ignored.
   2. If the utility mitigates for the environmental effects, the project is not acceptable. However, before the company chooses to do the project without mitigation, it needs to make sure that any costs of "ill will" for not mitigating for the environmental effects have been considered in the original analysis.
   3. The environmental effects should be treated as a remote possibility and should only be considered at the time in which they actually occur.
   4. The environmental effects if not mitigated would result in additional cash flows. Therefore, since the plant is legal without mitigation, there are no benefits to performing a "no mitigation" analysis.
   5. The environmental effects should be ignored since the plant is legal without mitigation.
   
   _______________

1. Should this project be undertaken?
   1. The project should be undertaken since the NPV is positive under both the "mitigation" and "no mitigation" assumptions.
   2. Even when no mitigation is considered the project has a negative NPV, so it should not be undertaken.
   3. The project should be undertaken only if they do not mitigate for the environmental effects. However, they want to make sure that they've done the analysis properly due to any "ill will" and additional "costs" that might result from undertaking the project without concern for the environmental impacts.
   4. The project should be undertaken only under the "mitigation" assumption.
   5. The project should be undertaken since the IRR is positive under both the "mitigation" and "no mitigation" assumptions.

______________

An electric utility is considering a new power plant in northern Arizona. Power from the plant would be sold in the Phoenix area, where it is badly needed. Because the firm has received a permit, the plant would be legal; but it would cause some air pollution. The company could spend an additional $40 million at Year 0 to mitigate the environmental problem, but it would not be required to do so. The plant without mitigation would cost $239.88 million, and the expected cash inflows would be $80 million per year for 5 years. If the firm does invest in mitigation, the annual inflows would be $85.32 million. Unemployment in the area where the plant would be built is high, and the plant would provide about 350 good jobs. The risk adjusted WACC is 16%. Calculate the NPV and IRR with mitigation. Round your answers to two decimal places. Enter your answer for NPV in millions. Do not round your intermediate calculations. For example, an answer of $10,550,000 should be entered as 10.55. Negative value should be indicated by a minus sign. NPV $ million IRR % Calculate the NPV and IRR without mitigation. Round your answers to two decimal places. Enter your answer for NPV in millions. Do not round your intermediate calculations. For example, an answer of $10,550,000 should be entered as 10.55. NPV $ million IRR % How should the environmental effects be dealt with when evaluating this project? The environmental effects should be treated as a sunk cost and therefore ignored. If the utility mitigates for the environmental effects, the project is not acceptable. However, before the company chooses to do the project without mitigation, it needs to make sure that any costs of "ill will" for not mitigating for the environmental effects have been considered in the original analysis. The environmental effects should be treated as a remote possibility and should only be considered at the time in which they actually occur. The environmental effects if not mitigated would result in additional cash flows. Therefore, since the plant is legal without mitigation, there are no benefits to performing a "no mitigation" analysis. The environmental effects should be ignored since the plant is legal without mitigation. Should this project be undertaken? The project should be undertaken since the NPV is positive under both the "mitigation" and "no mitigation" assumptions. Even when no mitigation is considered the project has a negative NPV, so it should not be undertaken. The project should be undertaken only if they do not mitigate for the environmental effects. However, they want to make sure that they've done the analysis properly due to any "ill will" and additional "costs" that might result from undertaking the project without concern for the environmental impacts. The project should be undertaken only under the "mitigation" assumption. The project should be undertaken since the IRR is positive under both the "mitigation" and "no mitigation" assumptions.

An electric utility is considering a new power plant in northern Arizona. Power from the plant would be sold in the Phoenix area, where it is badly needed. Because the firm has received a permit, the plant would be legal; but it would cause some air pollution. The company could spend an additional $40 million at Year 0 to mitigate the environmental problem, but it would not be required to do so. The plant without mitigation would cost $270.70 million, and the expected cash inflows would be $90 million per year for 5 years. If the firm does invest in mitigation, the annual inflows would be $94.58 million. Unemployment in the area where the plant would be built is high, and the plant would provide about 350 good jobs. The risk adjusted WACC is 18%. Calculate the NPV and IRR with mitigation. Round your answers to two decimal places. Enter your answer for NPV in millions. Do not round your intermediate calculations. For example, an answer of $10,550,000 should be entered as 10.55. Negative value should be indicated by a minus sign. NPV $ million IRR % Calculate the NPV and IRR without mitigation. Round your answers to two decimal places. Enter your answer for NPV in millions. Do not round your intermediate calculations. For example, an answer of $10,550,000 should be entered as 10.55. NPV $ million IRR % How should the environmental effects be dealt with when evaluating this project? The environmental effects if not mitigated would result in additional cash flows. Therefore, since the plant is legal without mitigation, there are no benefits to performing a "no mitigation" analysis. The environmental effects should be ignored since the plant is legal without mitigation. The environmental effects should be treated as a sunk cost and therefore ignored. If the utility mitigates for the environmental effects, the project is not acceptable. However, before the company chooses to do the project without mitigation, it needs to make sure that any costs of "ill will" for not mitigating for the environmental effects have been considered in the original analysis. The environmental effects should be treated as a remote possibility and should only be considered at the time in which they actually occur. Should this project be undertaken? Even when no mitigation is considered the project has a negative NPV, so it should not be undertaken. The project should be undertaken only if they do not mitigate for the environmental effects. However, they want to make sure that they've done the analysis properly due to any "ill will" and additional "costs" that might result from undertaking the project without concern for the environmental impacts. The project should be undertaken only under the "mitigation" assumption. The project should be undertaken since the IRR is positive under both the "mitigation" and "no mitigation" assumptions. The project should be undertaken since the NPV is positive under both the "mitigation" and "no mitigation" assumptions. Check My Work (2 remaining)

An electric utility is considering a new power plant in northern Arizona. Power from the plant would be sold in the Phoenix area, where it is badly needed. Because the firm has received a permit, the plant would be legal; but it would cause some air pollution. The company could spend an additional $40 million at Year 0 to mitigate the environmental problem, but it would not be required to do so. The plant without mitigation would cost $240.62 million, and the expected cash inflows would be $80 million per year for 5 years. If the firm does invest in mitigation, the annual inflows would be $85.18 million. Unemployment in the area where the plant would be built is high, and the plant would provide about 350 good jobs. The risk adjusted WACC is 18%.

Calculate the NPV and IRR with mitigation. Round your answers to two decimal places. Enter your answer for NPV in millions. Do not round your intermediate calculations. For example, an answer of $10,550,000 should be entered as 10.55. Negative value should be indicated by a minus sign.
NPV $   million
IRR %

Calculate the NPV and IRR without mitigation. Round your answers to two decimal places. Enter your answer for NPV in millions. Do not round your intermediate calculations. For example, an answer of $10,550,000 should be entered as 10.55.
NPV $   million
IRR %

How should the environmental effects be dealt with when evaluating this project?

The environmental effects should be treated as a sunk cost and therefore ignored.

If the utility mitigates for the environmental effects, the project is not acceptable. However, before the company chooses to do the project without mitigation, it needs to make sure that any costs of "ill will" for not mitigating for the environmental effects have been considered in the original analysis.

The environmental effects should be treated as a remote possibility and should only be considered at the time in which they actually occur.

The environmental effects if not mitigated would result in additional cash flows. Therefore, since the plant is legal without mitigation, there are no benefits to performing a "no mitigation" analysis.

The environmental effects should be ignored since the plant is legal without mitigation.

Should this project be undertaken?

The project should be undertaken since the NPV is positive under both the "mitigation" and "no mitigation" assumptions.

Even when no mitigation is considered the project has a negative NPV, so it should not be undertaken.

The project should be undertaken only if they do not mitigate for the environmental effects. However, they want to make sure that they've done the analysis properly due to any "ill will" and additional "costs" that might result from undertaking the project without concern for the environmental impacts.

The project should be undertaken only under the "mitigation" assumption.

The project should be undertaken since the IRR is positive under both the "mitigation" and "no mitigation" assumptions.

(Spreadsheet Problem)

You run a manufacturing facility. Last year your facility manufactured 21 products with the following characteristics:

Activity-Based Costing (ABC)

In addition, the following data is known about last year:

- 1.1 million labor hours were used to build the 21 products (note, “labor hours” and “fabrication hours” are not the same)

- $37/hour labor rate

- Assume there is no inflation

You are considering manufacturing the following 3 new products:

Use ABC to determine how much you should quote customers for each of the products (assume no profit in the quotes). Your answer should be based on last year’s history (do not assume that products A, B, and C have or are necessarily going to be built)

Hints:

1)You will need to figure out the number of engineering hours and fabrication hours needed for the three new products

2)You can figure out the labor hours associated with each new product from last year’s ratio of labor hours to fabrication hours.

An electric utility is considering a new power plant in northern Arizona. Power from the plant would be sold in the Phoenix area, where it is badly needed. Because the firm has received a permit, the plant would be legal; but it would cause some air pollution. The company could spend an additional $40 million at Year 0 to mitigate the environmental problem, but it would not be required to do so. The plant without mitigation would cost $209.71 million, and the expected cash inflows would be $70 million per year for 5 years. If the firm does invest in mitigation, the annual inflows would be $74.99 million. Unemployment in the area where the plant would be built is high, and the plant would provide about 350 good jobs. The risk adjusted WACC is 19%.

1. Calculate the NPV and IRR with mitigation. Round your answers to two decimal places. Enter your answer for NPV in millions. Do not round your intermediate calculations. For example, an answer of $10,550,000 should be entered as 10.55. Negative value should be indicated by a minus sign.
   NPV $   million
   IRR  %

   Calculate the NPV and IRR without mitigation. Round your answers to two decimal places. Enter your answer for NPV in millions. Do not round your intermediate calculations. For example, an answer of $10,550,000 should be entered as 10.55.
   NPV $   million
   IRR  %

2. How should the environmental effects be dealt with when evaluating this project?
   1. If the utility mitigates for the environmental effects, the project is not acceptable. However, before the company chooses to do the project without mitigation, it needs to make sure that any costs of "ill will" for not mitigating for the environmental effects have been considered in the original analysis.
   2. The environmental effects should be treated as a remote possibility and should only be considered at the time in which they actually occur.
   3. The environmental effects if not mitigated would result in additional cash flows. Therefore, since the plant is legal without mitigation, there are no benefits to performing a "no mitigation" analysis.
   4. The environmental effects should be ignored since the plant is legal without mitigation.
   5. The environmental effects should be treated as a sunk cost and therefore ignored.
   
   
3. Should this project be undertaken?
   1. The project should be undertaken since the IRR is positive under both the "mitigation" and "no mitigation" assumptions.
   2. The project should be undertaken since the NPV is positive under both the "mitigation" and "no mitigation" assumptions.
   3. Even when no mitigation is considered the project has a negative NPV, so it should not be undertaken.
   4. The project should be undertaken only if they do not mitigate for the environmental effects. However, they want to make sure that they've done the analysis properly due to any "ill will" and additional "costs" that might result from undertaking the project without concern for the environmental impacts.
   5. The project should be undertaken only under the "mitigation" assumption.