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 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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