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A shrewd businessman offers the managers of Marcus Inc. the following modified project: The firm will pay the initial outlay $575,000 only in year 2 and receive the $500,000 in years 0 and 1. As a compensation for receiving this offer, the businessman proposes that the firm pay him $1,100,000 in year 3. The cost of capital is 25%.
Marcus Inc.’s CFO argues that according to the
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- Staten Corporation is considering two mutually exclusive projects. Both require an initial outlay of 150,000 and will operate for five years. The cash flows associated with these projects are as follows: Statens required rate of return is 10%. Using the net present value method and the present value table provided in Appendix A, which of the following actions would you recommend to Staten? a. Accept Project X and reject Project Y. b. Accept Project Y and reject Project X. c. Accept Projects X and Y. d. Reject Projects X and Y.Manny Carson, certified management accountant and controller of Wakeman Enterprises, has been given permission to acquire a new computer and software for the company’s accounting system. The capital investment analysis showed an NPV of $100,000. However, the initial estimates of acquisition and installation costs were made on the basis of tentative costs without any formal bids. Manny now has two formal bids, one that would allow the firm to meet or beat the original projected NPV and one that would reduce the projected NPV by $50,000. The second bid involves a system that would increase both the initial cost and the operating cost. Normally, Manny would take the first bid without hesitation. However, Todd Downing, the owner of the firm presenting the second bid, is a close friend. Manny called Todd and explained the situation, offering Todd an opportunity to alter his bid and win the job. Todd thanked Manny and then made a counteroffer. Todd: Listen, Manny, this job at the original…Arrow Electronics is considering Projects S and L, which are mutually exclusive, equally risky, and not repeatable. Project S has an initial cost of $1 million and cash inflows of $370.000 for 4 years, while Project L has an initial cost of $2 million and cash inflows of $720, 000 for 4 years. The CEO wants to use the IRR criterion. while the CFO favors the NPV method, using a WACC of 6.67%.
- Shell Camping Gear, , is considering two mutually exclusive projects. Each requires an initial investment of $100,000. John Shell, president of the company, has set a maximum payback period of 4 years. The after-tax cash inflows associated with each project are shown in the following table. Because they are mutually exclusive, Shell must choose Which should the company invest in?Gamble Company convinced Conservative Corporation that the two companies should establish Simpletown Corporation to build a new gambling casino in Simpletown Corner. Although chances for the casino’s success were relatively low, a local bank loaned $140 million to the new corporation, which built the casino at a cost of $130 million. Conservative purchased 100 percent of the initial capital stock offering for $5.6 million, and Gamble agreed to supply 100 percent of the management, which would include directing Simpletown's day-to-day activities. Gamble also agreed to guarantee the bank loan. Additionally, Gamble guaranteed a 20 percent return to Conservative on its investment for the first 10 years. Gamble will receive all profits in excess of the 20 percent return to Conservative. Immediately after the casino’s construction, Gamble reported the following amounts: Cash $ 3,000,000 Buildings and Equipment 240,600,000 Accumulated Depreciation 10,100,000 Accounts Payable…Dark Creek Corporation's CEO is selecting between two mutually exclusive projects. Thecompany needs to make a $3,500 payment to bondholders at the end of the year. To minimize agency costs, the firm's bondholders decide to use a bond covenant to stipulate that the bondholders can demand an additional payment if the company chooses to take on the high- volatility project. How much additional payment to bondholders would make stockholders indifferent between the two projects? Cash flows pertaining to the two projects are shown in the table
- you have been asked by the president of your company to evaluate the proposed acquisition of a new special purpose truck for $70,000. The Truck falls into the MACRS three-year class, and it will be sold after 3 years for $5,000. Use of the truck will require an increase in NWC of $10,000. The truck will have no effect on revenues, but it is expected to save the firm $32,000 per year in before-tax operating costs, mainly labour. The firm's marginal tax rate is 40 percent. What will the operating cashflow for this project be during year 2?Suppose that Corporation is to consider a new project that requires $0.8 million finance with the interest rate of 10% and is expected to generate additional cash flow of $120,000 each year. In terms of financing, the firm is to borrow the money from David Lee, the owner of the firm. Assuming the cost of capital for all equity firm is 10%, compute the value of this firm if the corporate tax of 50% is imposed.Gemini, Inc., an all-equity firm, is considering a $1.7 million investment that will be depreciated according to the straight-line method over its four-year life. The project is expected to generate earnings before taxes and depreciation of $595,000 per year for four years. The investment will not change the risk level of the firm. The company can obtain a four-year, 9.5 percent loan to finance the project from a local bank. They will receive the total amount needed for investment ($1.7 million at time 0 and all principal will be repaid in one balloon payment at the end of the fourth year (similar to a bond). Every year the company would need to pay interest (@9.5%). If the company finances the project entirely with equity, the firm’s cost of capital would be 13 percent. The corporate tax rate is 30 percent. Calculate the cash flows and NPV for the two cases:
