Problem 1:
F2 Industries is considering the replacement of its old, fully depreciated dozer. Two upgraded used models under consideration. The Komatsu D39-22 with a cost of $190,000 with and an expected remaining life of 3 years. The D39-22 will provide after tax cash flows (labor savings and depreciation) of $87,000 per year. The second dozer is a Case D-9 which costs $360,000 has a remaining life of 6 years and will produce after tax cash flows of $98,300 per year. Because of the current economic conditions surrounding construction dozers are not expected to rise over the life of the project. Assume F2 Industries cost of capital is 14%. The question is; should the firm replace its current dozer which is fully depreciated but still operational. If so which dozer should be purchased? By how much would the value of the firm be increased with a purchase of a more modern dozer?
Problem 2:
The Everly Equipment Company purchased a machine 5 years ago at a cost of $90,000. The machine had an expected life of 10 years at the time of purchase, and it is being depreciated bt the straight line method at $9,000. If the machine is not replaced it can be sold at the end of its useful life fo $10,000.
A new machine can be purchased for $150,000, including installation costs. During its 5 year life it will reduce cash operation expenses, by $50,000 per year. Sale are not expected to change. At the end of its useful life the machine is estimated to be worthless. MACRS depreciation will be used and the machine will be depreciated over its 3 year class life rather its 5 year economic life. (33%, 45%, 15%, and 7%)
The old machine can be sold today for $55,000. The firms tax rate is 35% and its WACC is 16%. Answer the following questions;
a. If the new machine is purchased, what is the amount of the initial cash flow at time = to 0
b. What are the incremental cash flows that will occur in years 1-5
c. What is the NPV of the Project,
d. Shod the old machine be replaced.
Problem 3:
Conneaut Concessions Corporation is trying to determine the effect of Inventory Turnover ratio and Days Sales Outstanding on its cash flow cycle. Sales last year ( all on credit) were $150,000and it earned a net profit of 6%, $9,000. It turned over its inventory 7.5 times during the year and its DSO was 36.5 days. Its annual cost of goods was 121,667. The firm had fixed assets totaling $35,000. The payable defer period is 40 days.
a. Calculate the cash conversion cycle
b. Assuming they hold negligible amounts of cash and marketable securities, calculate its total asset turnover
c. Suppose that the managers believe that that the annual inventory turnover can be raised to 9 times with no effect on sales. What would the Cash Conversion cycle, total asset turnover, and Return on Assets have been.
Problem 4:
An investor in the United States purchased a one-year Brazilian security valued at 195,000 Brazilian reals. The U.S. dollar equivalent was $100,000. The Brazilian security earned 16% , but the Brazilian real depreciated 5 cents against the U.S. dollar during the time period. ($.51 to $.46) After transferring the funds back to the United States, what was the investor's return on her $100,000. Determine the total ending value of the Brazilian investment in Brazilian reals and then translate this Brazilian value to U.S. dollars. Then compute the return on the $100,000.
Problem 5:
Saven Travel Corporation is considering several investment opportunities in order to diversify its operations. Mr. Saven, president, is trying to determine the firm's cost of capital before he makes a decision. This diversification plan will require the firm to raise $400 million. A share of common stock is currently selling for $50, and the amount of the last dividend paid was $1.25. The company's earnings and dividends have been growing at about 12%, however, this is expected to drop to 9% per year in the future. Flotation costs of new common will be $4.00 per share. The firm can raise $150 million internally through retained earnings. The firm's investment dealer has informed Mr. Saven that this amount of equity can support $100 million in 12% coupon bonds. The company's tax rate is 46%.
A) Compute the weighted average cost of capital on the first $250 million of funds.
B) Saven Travel will need to raise $150 of additional capital for expansion. How much of this will be debt and equity?
C) Compute the marginal cost of capital on the additional $150 million assuming the cost of debt stays the same.
Problem 6:
Explain how the concept of purchasing power parity and the "Law of One Price" affects arbitrage opportunities and global competition.