Problem 1. Briarcrest Condiments is a spice-making firm. Recently, it developed a new process for producing spices. The process requires new machinery that would cost $1,968,450. have a life of five years, and would produce the cash flows shown in the following table.
|
Year
|
Cash Flow
|
|
1
|
$512,496
|
|
2
|
-242,637
|
|
3
|
814,558
|
|
4
|
887,225
|
|
5
|
712,642
|
What is the NPV if the discount rate is 15.9 percent?
Problem 2. Briarcrest Condiments is a spice-making firm. Recently, it developed a new process for producing spices. The process requires new machinery that would cost $1,968,450. have a life of five years, and would produce the cash flows shown in the following table.
|
Year
|
Cash Flow
|
|
1
|
$512,496
|
|
2
|
-242,637
|
|
3
|
814,558
|
|
4
|
887,225
|
|
5
|
712,642
|
What is the NPV if the discount rate is 15.9 percent?
Problem 3. Bell Mountain Vineyards is considering updating its current manual accounting system with a high-end electronic system. While the new accounting system would save the company money, the cost of the system continues to decline. The Bell Mountain's opportunity cost of capital is 10 percent, and the costs and values of investments made at different times in the future are as follows:
|
Year
|
Cost
|
Value of Future Savings
(at time of purchase)
|
|
0
|
$5,000
|
$7,000
|
|
|
1
|
4,500
|
7,000
|
|
|
2
|
4,000
|
7,000
|
|
|
3
|
3,600
|
7,000
|
|
|
4
|
3,300
|
7,000
|
|
|
5
|
3,100
|
7,000
|
|
Calculate the NPV of each choice.
Problem 4. Chip's Home Brew Whiskey management forecasts that if the firm sells each bottle of Snake-Bite for $20, then the demand for the product will be 15,000 bottles per year, whereas sales will be 90 percent as high if the price is raised 10 percent. Chip's variable cost per bottle is $10, and the total fixed cash cost for the year is $100,000. Depreciation and amortization charges are $20,000, and the firm has a 30 percent marginal tax rate. Management anticipates an increased working capital need of $3,000 for the year. What will be the effect of the price increase on the firm's FCF for the year?
Problem 5. Capital Co. has a capital structure, based on current market values, that consists of 50 percent debt, 10 percent preferred stock, and 40 percent common stock. If the returns required by investors are 8 percent, 10 percent, and 15 percent for the debt, preferred stock, and common stock, respectively, what is Capital's after-tax WACC? Assume that the firm's marginal tax rate is 40 percent.