Question 1:
Tabletop Ranches, Inc. is considering the purchase of a new helicopter for $350.000. The firm's old helicopter has a book value of $85,000, but it can only be sold for $60,000. It was being depreciated at the rate of $13,500 per year for four more years under an old depreciation method.
The new helicopter will be depreciated using the 5-year MACRS schedule. It is expected to save $62,000 after taxes through reduced fuel and maintenance expenses. Tabletop Ranch is in the 34% tax bracket and has a 12% cost of capital.
a. Calculate the cash inflows from selling the old helicopter.
b. Calculate the net cost of the new helicopter.
c. Calculate the incremental depreciation for the new helicopter.
d. Calculate the net cash flows for the purchase.
Question 2:
Fritz Corporation has 800.000 shares of preferred stock and 1,800,000 shares of common stock. The cumulative preferred stock has a stated dividend of $2.50 per share. Under normal conditions, Kreisler pays out 30% of earnings available to common stockholders; however, because of a severe recession. Fritz retained all earnings last year. This year. Fritz earned net income of $6.4
Calculate the dividend per share to be received by the common stockholders this year.
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Cooper Construction is considering purchasing new, technologically advanced equipment. The equipment will cost $625.000 with a salvage value of $50,000 at the end of its useful life of 10 years. The equipment is expected to generate additional annual cash inflows with the following probabilities for the next ten years:
|
Probability
|
Cash Flow
|
|
.15
|
360.000
|
|
.25
|
85.000
|
|
.45
|
110.000
|
|
.15
|
130.000
|
a. What is the expected cash flew?
b. Coopers cost of capital is 10%. 'A hat is the expected net present value?
c. Should Cooper buy the equipment?
Question 3:
In order to evaluate risk, management may set qualitative risk classes. Rank these four projects from the least to the most risky, and explain the risks involved in each project
1. Completely new market in United States.
2. Completely new market in South America.
3. Addition to related product line.
4. Repair to old owned machinery.