[The following information applies to the questions displayed below.]

Harris Corp. is a technology start-up currently in its second year of operations. The company didn’t purchase any assets this year but purchased the following assets in the prior year:

Harris did not know depreciation was tax deductible until it hired an accountant this year and didn’t claim any depreciation deduction in its first year of operation. (Use MACRS Table 1 and Table 2.)

a. What is the maximum amount of depreciation deduction Harris Corp. can deduct in its second year of operation?

b. What is the basis of the office equipment at the end of the second year?

Oregon Forest Products will acquire new equipment that falls under the five-year MACRS category. The cost is $330,000. If the equipment is purchased, the following earnings before depreciation and taxes will be generated for the next six years. Use Table 12-12. Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods. Earnings before Depreciation Year 1 $ 111,000 Year 2 130,000 Year 3 95,000 Year 4 57,000 Year 5 48,000 Year 6 31,000 The firm is in a 30 percent tax bracket and has a 12 percent cost of capital. a. Calculate the net present value. b. Under the net present value method, should Oregon Forest Products purchase the equipment asset? Yes No

A machine costing $210,200 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 483,000 units of product during its life. It actually produces the following units: 122,000 in 1st year, 122,800 in 2nd year, 120,700 in 3rd year, 127,500 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.)

PROBLEM 2 West Hills Village (WHV) in Rapid City, South Dakota is evaluating a guideline lease agreement on laundry equipment that costs $250,000 and falls into the MACRS three-year class. The home can borrow at an 8 percent rate on a four-year loan if WHV decided to borrow and buy rather than lease. The laundry equipment has a four-year economic life, and its estimated residual value is $50,000 at the end of Year 4. If WHV buys the equipment, it would purchase a maintenance contract which costs $5,000 per year, payable at the beginning of each year. The lease terms, which include maintenance, call for a $71,000 lease payment at the beginning of each year. WNV's tax rate is 40 percent. Should the home lease or buy?

A group of entrepreneurs want to purchase a rural hotel.

The renovation and purchase of the hotel has an estimated cost of €525,000.

This capital investment will be depreciated consistently over the next 5 years.

It is estimated that there will be 4,000 rooms total occupation per year, at a rate of €100 per room/night. Room occupation will rise by 5% year over year.

Running costs are estimated as €290,000 for the first year and will increase by 5% year over year.

The tax rate is 35%.

Step 1: Calculate the initial free cash flows correctly.

Step 2: If the partners require a minimum return of 8% on their investments, would you recommend that these businessmen buy the hotel? (Assume a continuous increase in cash flow of 1% from the 5^th year forwards). Why or why not?

1.What is the price of a 20-year bond paying 7 % annual coupons with a face (par) value of $1,000 if an 20-year bond making semi-annual payments and paying 7 % sells at par? Answer to the nearest cent, xxx.xx and enter without the dollar sign.

2.Suppose the interest rate on a 1-year T-bond is 6.3 % and that on a 3 year T-bond is 7.3 %.

Assuming the pure expectations theory is correct, what is the market's forecast for 2-year rates 1 year from now?

Enter your answer as a percentage and do not use the % symbol.

3.What is the price of a 19-year bond paying 6.1 % annual coupons with a face (par) value of $1,000 if the market rates for these bonds are 8.9 %? Answer to the nearest cent, xxx.xx and enter without the dollar sign.

An Adjustable Rate Mortgage (ARM) is made for $300,000 at an initial interest rate of 2 percent for

30 years. The ARM will be adjusted annually. The borrower believes that the interest rate at the

beginning of the year (BOY) 2 will increase to three percent (3%).

a. Assuming that the ARM is fully amortizing, what will monthly payments be during year 1?

b. Based on (a) what will the loan balance be at the end of year (EOY) 1?

c. Given that the interest rate is expected to be 3 percent at the beginning of year 2, what will

monthly payments be during year 2?

d. What will be the loan balance at the EOY 2?

e. What would be the monthly payments in year 1 if they are to be interest only?

f. Assuming terms in (e), what would monthly interest only payments be in year 2?

Jane is a project manager for Jackson Drinks Inc. She is evaluating the feasibility of project to construct a plant to produce a new health drink. She has the following information.

·         Sales of 500,000 bottles/year with a price of $6/bottle.

·         Variable cost per bottle is $3 per bottle.

·         Fixed costs are $500,000 per year.

·         Project life is 5 years.

·         Initial Investment (cash outlay) is $2,000,000.

·         Depreciation is $400,000/year.

·         Additional net working capital of $1,000,000 required. Same for all periods.

·         The firm’s required return is 16%.

·         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 Jackson Drinks Inc. accept or reject the project?

An insurance company accepts an obligation to pay $7,000 at the end year 1, pay $8,000 at the end of year 2, and pay $9,600 at the end of year 3. The insurance company purchases a combination of the following three bonds in order to exactly match its obligation.

• Bond 1: 1-year 6% annual coupon bond with yield rate of 8%.

• Bond 2: 2-year zero coupon bond with yield rate of 7%.

• Bond 3: 3-year 20% annual coupon bond with yield rate of 12%.

(a) What face amount of each bond should the insurance company buy to do this?

(b) What price should the insurance company pay for the 3-year bond?

Please show detailed steps, and please don't use excel. I want to understand this.

TA is considering investing in one of the following two projects, where the chosen project will be replicated repeatedly in the future:

Which project is most beneficial for TA, and what is its EAA?

(A.) Project X; EAA = $12,341

(B.) Project X; EAA = $30,691

(C.) Project Y; EAA = $11,876

(D.) Project Y; EAA = $37,644

(E.) Neither Project X nor Project Y