## Description

The process requires new machinery that would cost $2,142,067. have a life of five years, and would

produce the cash flows shown in the following table.

Year

Cash Flow

1

$630,626

2

-247,417

3

826,369

4

796,728

5

834,219

What is the NPV if the discount rate is 16.83 percent? (Enter negative amounts using negative sign e.g.

-45.25. Round answer to 2 decimal places, e.g. 15.25.)

NPV is =

2. Archer Daniels Midland Company is considering buying a new farm that it plans to operate for 10 years.

The farm will require an initial investment of $11.90 million. This investment will consist of $2.30 million

for land and $9.60 million for trucks and other equipment. The land, all trucks, and all other equipment is

expected to be sold at the end of 10 years at a price of $5.00 million, $2.14 million above book value. The

farm is expected to produce revenue of $2.00 million each year, and annual cash flow from operations

equals $1.85 million. The marginal tax rate is 35 percent, and the appropriate discount rate is 9 percent.

Calculate the NPV of this investment. (Round intermediate calculations and final answer to 2 decimal

places, e.g. 15.25.)

NPV is =

The project should be accepted or rejected?

3. Bell Mountain Vineyards is considering updating its current manual accounting system with a high-end

electronic system. While the new accounting system would save the company money, the cost of the system

continues to decline. The Bell Mountainâ€™s opportunity cost of capital is 11.0 percent, and the costs and

values of investments made at different times in the future are as follows:

Value of Future Savings

Year

Cost

(at time of purchase)

0

$5,000

$7,000

1

4,450

7,000

2

3,900

7,000

3

3,350

7,000

4

2,800

7,000

5

2,250

7,000

Calculate the NPV of each choice. (Round answers to the nearest whole dollar, e.g. 5,275.)

The NPV of each choice is:

NPV0 = $

NPV1 = $

NPV2 = $

NPV3 = $

NPV4 = $

NPV5 = $

Suggest when should Bell Mountain buy the new accounting system?

Bell Mountain should purchase the system in year 1 or year 2 or year3 or year 4, or year 5? Which

one .

4. Chipâ€™s Home Brew Whiskey management forecasts that if the firm sells each bottle of Snake-Bite for

$20, then the demand for the product will be 15,000 bottles per year, whereas sales will be 91 percent as

high if the price is raised 10 percent. Chipâ€™s variable cost per bottle is $10, and the total fixed cash cost for

the year is $100,000. Depreciation and amortization charges are $20,000, and the firm has a 30 percent

marginal tax rate. Management anticipates an increased working capital need of $3,000 for the year. What

will be the effect of the price increase on the firmâ€™s FCF for the year? (Round answers to nearest whole

dollar, e.g. 5,275.)

At $20 per bottle the Chipâ€™s FCF is $______________

And at the new price Chipâ€™s FCF is $_______________

5. Capital Co. has a capital structure, based on current market values, that consists of 28 percent debt, 7

percent preferred stock, and 65 percent common stock. If the returns required by investors are 9 percent, 10

percent, and 18 percent for the debt, preferred stock, and common stock, respectively, what is Capitalâ€™s

after-tax WACC? Assume that the firmâ€™s marginal tax rate is 40 percent. (Round intermediate calculations

to 4 decimal places, e.g. 1.2514 and final answer to 2 decimal places, e.g. 15.25%.)

After Tax WACC= _________%

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