Fin 571 week 6 assignment

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1. Briarcrest Condiments is a spice-making firm. Recently, it developed a new process for producing spices.
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 Mountain’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. Chip’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. Chip’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 firm’s FCF for the year? (Round answers to nearest whole
dollar, e.g. 5,275.)
At $20 per bottle the Chip’s FCF is $______________
And at the new price Chip’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 Capital’s
after-tax WACC? Assume that the firm’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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