1. Gateway Communications is considering a project with an initial fixed asset cost of $2.46 million which will be depreciated straight-line to a zero book value over the 10-year life of the project. At the end of the project the equipment will be sold for an estimated $300,000. The project will not directly produce any sales but will reduce operating costs by $725,000 a year. The tax rate is 35 percent. The project will require $45,000 of inventory which will be recouped when the project ends. What is the NPV of this project assuming the firm requires a 14 percent rate of return?
2. Mirror Ball Ranch is considering the purchase of a new excavator for $200,000. The new excavator has a useful life of 6 years, and will be depreciated under the MACRS method.
The new machine is expected to save $60,000 per year in reduced fuel and maintenance expenses. Mirror Ball believes the new asset will be sold for $25,000 after five years, although they plan to use a $0 salvage value for tax purposes. The investment would require an initial investment in working capital of $20,000 at the start of the project. Mirror Ball is in the 30% tax bracket and has a 15% cost of capital, but Mirror Ball decides to finance this investment with long term debt that can be issued at a rate of 10 percent.
REQUIRED:
a. IN GOOD FORM show all relevant cash flows for:
1. the purchase of the new machine
2. the annual flows over the life of the new machine
3. the end of the life of the new machine
b. What is the net present value of the new investment?
c. Calculate the IRR of this new investment.
d. What is the payback period of this new investment.
3- The approximate after-tax cost of debt for a 20-year, 7 percent, $1,000 par value bond selling at $960 (assume a marginal tax rate of 40 percent) is
4- A firm has issued 10 percent preferred stock, which sold for $100 per share par value. The cost of issuing and selling the stock was $2 per share. The firm's marginal tax rate is 40 percent. The cost of the preferred stock is
5-What would be the cost of new common stock equity for Tangshan Mining if the firm just paid a dividend of $4.25, the stock price is $55.00, dividends are expected to grow at 8.5 percent indefinitely, and flotation costs are $6.25 per share?
6-What would be the cost of retained earnings equity for Tangshan Mining if the expected return on U.S. Treasury Bills is 5.00%, the market risk premium is 10.00 percent, and the firm's beta is 1.3?
7-Phillips Equipment has 80,000 bonds outstanding that are selling at par. Bonds with similar characteristics are yielding 6.75 percent. The company also has 750,000 shares of 7 percent preferred stock and 2.5 million shares of common stock outstanding. The preferred stock sells for $53 a share. The common stock has a beta of 1.34 and sells for $42 a share. The U.S. Treasury bill is yielding 2.8 percent and the return on the market is 11.2 percent. The corporate tax rate is 38 percent. What is the firm's weighted average cost of capital?