Dow Chemical is considering a project that is expected to last 4 years with the following details: Year 1 revenues of $560,000 increasing at 5% per year thereafter. Costs for year 1 are $200,000 and are expected to increase at 6% per year thereafter. The project will require new equipment valued at $400,000. This equipment will be depreciated to zero using the straight-line depreciation method over the 4-year life. Working capital at the firm will have to rise to $50,000 from the current level of $10,000 immediately, will fall down to $30,000 in year 2 and back to the original $10,000 level in year 4. The firm’s average tax rate is 24% and its marginal tax rate is 38%. Forecast all incremental CFs for this project and compute its NPV based on a discount rate of 12%.

Gent Manufacturing Company purchased Equipment for $950,000 on January 4, 2015. The Equipment has an estimated useful life of five years and an estimated residual value of $60,000. The Equipment, which should last 50,000 hours, was operated 9,000 hours in 1; 8,500 hours in year 2; 12,000 in year 3; 10,500 in year 4; and 10,000 in year 5.

1. Computer the annual depreciation each year assuming the following depreciation methods: straight-line and double declining balance.

2. A) If the Equipment is sold for $300,000 after year 3, what would be the amount of gain or loss under the double-declining balance method?

B) f the Equipment is sold for $300,000 after year 3, what would be the amount of gain or loss under the straight line method?

Info given: Interest is expected to be 10% per year unless stated otherwise. Effective tax rate is 38% (Not necessary needed).

Hugo wants to purchase a Diamond Cutting Diamond Cutter, which costs $40,000 to purchase and $10,000 per year to operate. The operating costs increase by 10% per year every year after year 1. The machine has no salvage value, and a 20-year life.

A) What is the equivalent uniform annual cost of the Diamond Cutting Diamond Cutter machine over its entire life?

B) If the purchase price of the Diamond Cutting Diamond Cutter remains the same, when should a new one be purchased? If you should wait until the end of its life then enter 20. Otherwise enter the year when a new one should be bought.

1. If you invest $1,000 today at an interest rate of 10% per year, how much will you have 20 years from now, assuming no withdrawals in the interim?
2. What is the present value of the following cash flows at an interest rate of 10% per year?
   1. $100 received five years from now.
   2. $100 received 60 years from now.
   3. $100 received each year beginning one year from now and ending 10 years from now.
   4. $100 received each year for 10 years beginning now.
   5. $100 each year beginning one year from now and continuing forever. (Hint: You do not need to use the financial keys of your calculator for this, just some common sense.)

You are buying a $1,250,000 property, financing it with an 75% loan-to-value ratio, adjustable rate mortgage with a teaser rate of 2.95%. At the end of the first year, the mortgage loan rate adjusts to 3.875%. The loan has a 5 percent payment cap. You expect the property to appreciate 5% each year. 30 year loan/360 months.

What is the teaser payment?

What is the outstanding balance on the 1-year reset date?

How much principal and interest was paid in the first year?

Given the reset interest rate, what is the uncapped payment?

How much higher (in percent) is the fully amortizing payment?

If the payment is capped, what is the new payment?

If the payment is capped, what is the negative amortization after the next year?

Neglecting selling expenses, what is the return on equity after the second year?

A survey asked university students who wanted to go to an exchange program, which city they will choose – London, Paris or Madrid. The exchange programs are only offered in the first and second year. The results are given below in the table.

a) Fill the table. What is the probability that a student chosen at random is a junior and did not select Madrid?

b) What is the probability that a student chosen at random selected London, given that the student is a senior (2nd year)?

c) It seems that Madrid becomes much more popular with second year students than in the first year. Can you figure out if being a second year student and choosing Madrid are independent events? Explain.

Jennifer is a project manager for Cyclone Fitness Inc. She is evaluating the feasibility of a project to build a new plant for manufacturing a new health drink. She has the following information. · Sales of 800,000 bottles/year with a price of $5/bottle. · Variable cost per bottle is $1.5 per bottle. · Fixed costs are $500,000 per year. · Project life is 5 years. · Initial Investment (cash outlay) is $5,000,000. · Depreciation is $1,000,000/year. · Additional net working capital of $1,500,000 required. Same for all periods. · The firm’s required return is 22%. · The tax rate is 30%.

a. What is the OCF in year 1 to year 5?

b. What is the (Free) Cash Flow in year 1 to year 5?

c. What is the NPV of the project? Should Cyclone Fitness Inc. accept or reject the project?

Skeets Mfg Inc forecasts the following financial information for the next 3 years (in millions):

                                       Year 1                 Year 2                 Year 3

Revenues                       $25,200              $27,540              $32,300

Operating Expenses      $13,650              $13,848              $14,200

Depreciation                  $6,573                $5,580                $6,750

EBIT                                $4,977                $8,112                $11,350

Interest Expenses          $1,170                $1,572                $1,325

Taxes                              $1,332                $2,289                $3,509

Net Income                    $2,475                $4,251                $6,516

Increase in NWC            $165                   $420                   $735

The firm estimates capital expenditures of $1,200 million in year1, $750 million in year 2 and $1,550 million in year 3. Determine the value of the firm today if we assume that the free cash flows will grow at 3% per year indefinitely after year 3 and the firm has a weighted average cost of capital of 14%?

Question 4 (25 marks / Bond Market and Term Structure of Interest Rates)

1. a) You are considering investing in bonds and have collected the following information about the prices of a 1-year zero-coupon bond and a 2-year coupon bond.

   • - The 1-year discount bond pays $1,000 in one year and sells for a current price of $950.

   • - The 2-year coupon bond has a face value of $1,000 and an annual coupon of $60. The bond currently sells for a price of $1,050.

   1. i) What are the implied yields to maturity on one- and two-year discount bonds?

   2. ii) What is the implied forward rate between years 1 and 2?

   3. iii) Consider a 2-year annuity with annual coupon payments of $800. What is the most that you would be willing to pay for this annuity?

A machine costing $209,800 with a four-year life and an estimated $17,000 salvage value is installed in Luther Company’s factory on January 1. The factory manager estimates the machine will produce 482,000 units of product during its life. It actually produces the following units: 123,200 in 1st year, 123,700 in 2nd year, 119,800 in 3rd year, 125,300 in 4th year. The total number of units produced by the end of year 4 exceeds the original estimate—this difference was not predicted. (The machine must not be depreciated below its estimated salvage value.)

Required:

Compute depreciation for each year (and total depreciation of all years combined) for the machine under each depreciation method. (Round your per unit depreciation to 2 decimal places. Round your answers to the nearest whole dollar.)