Corp Finance Unit 6

For the purpose of calculating the net present value of the project, an appropriate cost of capital has to be calculated at which free cash flows of the project should be discounted. Since the project will be solely financed by selling new shares, cost of equity will be used as the discount rate. Beta for the company can be assumed to be equal to average of the betas of the competitors of the company. This average beta value comes out to be 1.2. Risk free rate is 0.17% while risk premium has been estimated to be 6%. Thus by putting these values in CAPM formula, we can find the cost of equity for the company which is 7.39%.

Keep using the old machine incurs higher cost(higher EAA) than replacing it with the new one. Therefore assuming sales are equal for both cases, when sales is smaller than 328338.07 and greater than 434036.67, Fonderia di Torino S.p.A should definitely replace the old machine with the new automated machine.

We assumed that the cost of graphite which according to exhibit 8 has been growing slower year on year would grow steadily at 4% and that power costs would grow at 12% per year up to 1989. We also assumed that the benefits of laminate technology will only be felt starting in 1981. With 1980 as the base year, the NPV calculation was done as at December, 1980 and we assumed that the cash injection of $2.5million dollars would occur instantaneously in December 1980. Using a median assumption of power cost savings of 17.5%, we arrive at an NPV of $12.865million for the laminate investment. The applicable range and full calculations are presented below.

In the UK, it is a must to follow the law of equality whilst employing any person for the job, according to section 159, positive action: Recruitment and selection of equality and anti-discrimination law (Butler, 2016). Therefore, according to this law if a person is having similar qualities and qualifications required as per the job description, is already working with the organisation, the organisation cannot recruit the person from outside and decline the promotion to the employee. If in the Debenhams department store there are more than one employee, who are experienced and eligible for the post of floor manager; it would be unethical and illegal to promote one employee over the other employee. Therefore, an organisation needs to make all

11. What is the Cost of Equity? ke = Risk Free Rate + (Beta X Risk Premium of 7.5% points). .03 + (.99 x .075) = 10.43%.

RE = [$1.30 × (1 + 0.060)] / $36.80 + 0.060 = 0.097446 = 9.74 percent (3)

Describe the social implications of business ethics facing Marks and Spencer in its different areas of activity.

"a. If each project's cost of capital is 12%, which project should be selected? If the cost of capital is 18%, what

9. Suppose that Whirlpool finds a way to reduce the costs of the project by 5%. Please change the cost factor in cell G31 to 95%. What is the value of the option now?

a. What risk-free rate and risk premium did you use to calculate the cost of equity?

In reviewing the proposal presented by Pressco, Inc. to provide new mechanical drying equipment at a cost of $2.9 million I have considered the cash flow implications of the purchase in terms of present value of the investment and estimated resulting savings, as well as possible alternatives to purchase, and the current political climate as it affects the business issues of taxation and energy policy.

Estimated machinery life: 3 years (after which there will be zero value for the equipment and no further cost savings)

The upgrade of the Rotterdam plant involves implementing the Japanese technology and requires a capital expenditure of £8.0 million with £3.5 million spent today, £2.0 million on year one, £1.0 million on year two and £1.0 million on year three. This will also increase polypropylene output by 7% from current levels at a rate of 2.0% per year. In addition, gross margin will improve by 0.8% per year from 11.5% to 16.0%. After auditing the financial models, it is concluded that the static net present value of the upgrade is -£6.35 million using a discount rate of 10% and an expected inflation rate of 3% annually. The Rotterdam upgrade contains an option to switch to the speculated German technology being available in five years. The current value of the option is zero as it is deeply out-of-the-money. The total net present value of the upgrade is -£6.35 million. The incremental earnings per share of the upgrade is £ 0.0013, the payback period is 14.13 years, and the internal rate of return is 18.7%.

9. (Ignore income taxes in this problem.) The Crawford Company is pondering an investment in a machine that

ML had developed a policy of selling manual machines and renting automatic machines. Manual machines did not cost much, did not require service, and could be modified to attach different fasteners inexpensively. Automatic machines were rented on an annual basis because they would have been more expensive to sell and it provided annual income to ML. However, about 700 of the rented machines were returned each year. During the time that machines were in inventory, ML would modify the machines to attach different fasteners. This was expensive with an average cost per modification of $2000. If all 700 machines were modified during a given year this would have cost $1.4 million per year. It was also industry practice to provide preventative maintenance and