Question 1 - (NPV, PI, and IRR calculations) Fijisawa Inc. is considering a major expansion of its product line and has estimated the following cash flows associated with such an expansion. The initial outlay would be $1,950,000, and the project would generate incremental free cash flows of $450,000 per year for 6 years. The appropriate required rate of return is 9 percent.
a. Calculate the NPV.
b. Calculate the PI.
c. Calculate the IRR.
d. Should this project
Question 2 - (Calculating free cash flows) Visible Fences is introducing a new product and has an expected change in EBIT of $900,000. Visible Fences has a 34 percent marginal tax rate. This project will also produce $300,000 of depreciation per year. In addition, in year 1 this project will also cause the following changes:
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Without the Project
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With the Project
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Account receivable
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$55,000
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$63,000
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Inventory
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55,000
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70,000
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Accounts payable
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90,000
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106,000
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Question 3 - (Cost of debt) Sincere Stationery Corporation needs to raise $500,000 to improve its manufacturing plant. It has decided to issue a $1,000 par value bond with a 14 percent annual coupon rate and a 10-year maturity. The investors require a 9 percent rate of return.
a. Compute the market value of the bonds.
b. What will the net price be if flotation costs are 10.5 percent of the market price?
c. How many bonds will the firm have to issue to receive the needed funds?
d. What is the firm's after-tax cost of debt if its average tax rate is 25 percent and its marginal tax rate is 34 percent?