A special bumper was installed on selected vehicles in a large
fleet. The dollar cost of body repairs was recorded for all
vehicles that were involved in accidents over a 1-year period.
Those with the special bumper are the test group and the other
vehicles are the control group, shown below. Each "repair incident"
is defined as an invoice (which might include more than one
separate type of damage).
| Statistic | Test Group | Control Group | ||||||||
| Mean Damage | X¯¯¯1X¯1 | = | $ | 1,157 | X¯¯¯2X¯2 | = | $ | 1,775 | ||
| Sample Std. Dev. | s1 | = | $ | 662 | s2 | = | $ | 827 | ||
| Repair Incidents | n1 | = | 17 | n2 | = | 13 | ||||
Source: Unpublished study by Thomas W. Lauer and Floyd G.
Willoughby.
(a) Construct a 98 percent confidence interval for
the true difference of the means assuming equal variances.
(Round your final answers to 3 decimal
places. Negative values should be indicated by a
minus sign.)
The 98% confidence interval is from ___ to ___
(b) Repeat part (a), using the assumption of
unequal variances with Welch's formula for d.f.
(Round the calculation for Welch's df to the nearest
integer. Round your final answers to 3 decimal places. Negative
values should be indicated by a minus sign.)
The 98% confidence interval is from ___ to ___
(c) Did the assumption about variances change the
conclusion?
Yes
No
(d) Construct separate 98% confidence intervals
for each mean. (Round your intermediate
tcrit value to 3 decimal places. Round your
final answers to 2 decimal places.)
| Mean Damage | Confidence Interval |
| x1=$1,157 | ($___ , $ ___ ) |
| x2=$1,775 | ($ ___ , $ ___ ) |
In: Statistics and Probability
Alpha Industries is considering a project with an initial cost of $7.5 million. The project will produce cash inflows of $1.55 million per year for 7 years. The project has the same risk as the firm. The firm has a pretax cost of debt of 5.46 percent and a cost of equity of 11.17 percent. The debt–equity ratio is .55 and the tax rate is 39 percent. What is the net present value of the project?
$263,559
$482,364
$463,811
$397,552
$417,430
In: Finance
1.1 A company with a cost of capital of 20% has identified projects with the following cash flows:
| Year | Project C | Project D |
| 0 | -N$100 000 | -N$30 000 |
| 1 | 40 000 | 10 000 |
| 2 | 45 000 | 15 000 |
| 3 | 50 000 | 20 000 |
| 4 | 55 000 | 25 000 |
Required 1:
a. Calculate the payback period of each project.
b. Calculate the NPV and IRR of each project.
c. Which project would you accept on basis of NPV? On basis of IRR?
d. Compare and contrast NPV and IRR by listing advantages and
disadvantages of each method. Based on the comparison, which of the
two projects would you recommend?
2.2 A firm has total financing of N$20.06 million
made up of N$14.46 million worth of equity and N$5.6 million worth
of debt. The after tax cost of debt is N$12.8%. The next dividend
is expected to be 10 cents, the current price is 50 cents
ex-dividend and the growth rate is 8%. The firm is planning to
raise N$5 million in new equity capital at 50 cents with floatation
costs of 2 cents per share.
Required 2:
Calculate the firm’s WACC.
In: Finance
Kerfuffle Corporation is considering the purchase of a new computer system. The cost for the new system, net of set-up and delivery costs, will be $1.6 million. The new system will provide annual before-tax cost savings of $500,000 for the next five years. The increased efficiency of the new system will lower net working capital by $200,000 today. The CCA rate on the new system will be 30%. At the end of five years, the system can be salvaged for $100,000. The firm’s required rate of return is 15%, and its marginal tax rate is 35%. What is the NPV of this cost-cutting project?
Select one:
a. -$224,011.86
b. -$22,882.55
c. $15,174.10
d. $76,552.80
e. $563,744.59
Lemington Enterprises is considering a project to replace its fleet of 10 vehicles. The company makes its fleet replacement decision every five years. Its current fleet of 10 vehicles was purchased five years ago at $50,000 each, and can be sold for $8,000 each today. The new vehicles will cost $60,000 each and will bring cost savings of $100,000 per year. In five years, the new vehicles can be sold for $9,000 each. If the fleet is not replaced today, the current fleet will have no salvage value in five years’ time. The CCA rate on these vehicles is 30%, and the company’s marginal tax rate is 35%. What is the PV(CCATS) for this replacement project, assuming a required rate of return of 10%? Round your answer to the nearest dollar.
Select one:
a. $115,626
b. $135,672
c. $130,295
d. $13,567
e. $148,711
Monsoon Inc. is considering bidding on a government project. To do the project, the company must make an initial investment of $8 million to purchase the necessary equipment. The project will last for five years, at the end of which the equipment can be salvaged for $500,000. The equipment has a CCA rate of 30%. The bidding process for the project requires the firm to submit a bid for a constant amount of $X before-tax, to be remitted by the government to the winning bidder each year. The firm’s marginal tax rate is 40%, and the required rate of return on similar projects is 18%. What is the minimum bid that the firm should submit for this project? Round your answer to the nearest dollar.
Select one:
a. $8,000,000
b. $3,191,717
c. $1,915,030
d. $3,308,198
e. $5,988,626
In: Finance
Intel's average cost in a given year falls with the quantity that it produces. In addition, extra production this year lowers the average cost curve next year. For example, in year 1,
AC=42
if quantity is 20 and
AC=30
if quantity is 60. If Intel produces 20 in year 1 and 40 in year 2, the average cost in year 2 will be
30.
However, for every extra 10 units it produces in year 1, its AC for any given quantity in year 2 falls by
5%.
What is the total cost and the average cost over the two years combined if the firm produces 20 in year 1 and 40 in year 2?
The total cost (C) is
C=$20402040.
(Enter your response rounded to two decimal places.)
The average cost (AC) is
AC=$3434.
(Enter your response rounded to two decimal places.)
What is the total cost and average cost over the two years combined if the firm produces 60 in year 1 and 40 in year 2?
The total cost (C) is
C=$nothing.
(Enter your response rounded to two decimal places.)
The average cost (AC) is
AC=$nothing.
(Enter your response rounded to two decimal places.)
Over the two years combined, what is the true additional cost of producing 60 instead of 20 in year 1?
The marginal cost of producing 60 units in year 1 instead of 20 is
In: Economics
Project A: This project requires an initial investment of $20,000,000 in equipment which will cost an additional $3,000,000 to install. The firm will use the attached MACRS depreciation schedule to expense this equipment. Once the equipment is installed, the company will need to increase raw goods inventory by $5,000,000, but it will also see an increase in accounts payable for $1,500,000. With this investment, the project will last 6 years at which time the market value for the equipment will be $1,000,000. The project will project a product with a sales price of $20.00 per unit and the variable cost per unit will be $10.00. It is estimated the sales volume for this project will be 700,000 in year 1, 1,000,000 in year 2, 650,000 in year 3, 700,000 in year 4, 650,000 in year 5 and 550,000 in year 6. The fixed costs would be $2,000,000 per year. Because this project is very close to current products sold by the business, management has expressed some favoritism towards this project and as allowed for a reduced rate of return of 2 percentage point below its current WACC as the valuation hurdle it must meet or surpass.
Create a valuation spreadsheet for each of the projects mentioned above. Evaluate each project according to the following valuation methods: a. Net Present Value of Discounted Cash Flow b. Internal Rate of Return c. Payback Period d. Profitability Index
Modified Accelerated Cost Recovery System (MACRS)
Ownership Year 5-Year Investment Class Depreciation Schedule
1 20%
2 32%
3 19%
4 12%
5 11%
6 6%
Total = 100%
WACC = 12.064%
In: Finance
|
You are evaluating a proposed expansion of an existing subsidiary located in Switzerland. The cost of the expansion would be SF 21 million. The cash flows from the project would be SF 5.9 million per year for the next five years. The dollar required return is 14 percent per year, and the current exchange rate is SF 1.11. The going rate on Eurodollars is 4 percent per year. It is 2 percent per year on Euroswiss. Use the approximate form of interest rate parity in calculating the expected spot rates. |
| a. |
Convert the projected franc flows into dollar flows and calculate the NPV. (Enter your answer in dollars, not in millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) |
| NPV | $ |
| b-1. |
What is the required return on franc flows? (Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16. Do not round intermediate calculations.) |
| Return on franc flows | % |
| b-2. |
What is the NPV of the project in Swiss francs? (Enter your answer in francs, not in millions of francs, e.g., 1,234,567. Round your answer to 2 decimal places, e.g., 32.16. Do not round intermediate calculations.) |
| NPV | SF |
| b-3. |
What is the NPV in dollars if you convert the franc NPV to dollars? (Enter your answer in dollars, not in millions of dollars, e.g., 1,234,567. Round your answer to 2 decimal places, e.g., 32.16. Do not round intermediate calculations. |
| NPV |
$ |
In: Finance
"A special-purpose machine is to be purchased at a cost of
$18,000. The expected annual operating and maintenance cost and the
salvage (or market) values for each year of the machine's service
are as follows.
Year of service 1; O&M costs $2200; Market value $14,400
Years of service 2; O&M costs $3300; Market value $11,100
Years of service 3; O&M costs $4000; Market value $5,700
Years of service 4; O&M costs $5500; Market value $3,000
Years of service 5; O&M costs $6100; Market value $0
If the interest rate is 13%, what is the economic service life for
this machine? Enter your answer as an integer between 1 and 5."
Answer is 1
In: Finance
Calculate NPV for a project with a period of 10 years, opportunity cost is 14%.
a. Initial investment USD 10,000 and cash inflows each year is USD 2,000
b. Initial investment USD 25,000 and cash inflows each year is USD 3,000
c. Initial investment USD 30,000 and cash inflows each year is USD 5,000
In: Accounting
You are evaluating the purchase of equipment for a house painting business. The total cost of the equipment is $27,000. You paid a consultant $1,000 to estimate the revenues expected from the equipment. The firm selling the equipment charges $600 for shipping.
The project's incremental operating cash flows before taxes will be $12,000 per year for four years. At the end of four years the equipment will have no value and will be scraped. The equipment has a three-year useful life and will be depreciated using the three-year MACRS depreciation schedule (assume these depreciation percentages: Yr 1: 33.3%, Yr 2: 44.5%, Yr 3: 14.8%, and Yr 4: 7.4%). The tax rate is 34% and the firm's required rate of return is 17%.
Calculate the cash flows from Years 0 through 4.
Should you purchase the equipment?
In: Finance