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1. Assume a company with 40% debt and 60% equity capital structure is considering a project that requires initial investment of $1,000,000. The project's net operating cash flow for the first year is $50,000 and it grows at 15%, 12%, and 10% in subsequent three years. After that it grows at a constant 5% annual rate into perpetuity. The company's cost of debt is 8% and its
a) Should this project be accepted assuming the company uses the same capital structure to finance it?
b) Holding other things the same, what perpetual growth rate after year 4 will result in zero
2. Ashford Company is considering an acquisition of a transport equipment that costs $250,000. The equipment has estimated economic life of 5 years. If acquired, the equipment depreciates to zero book value under the straight-line
Alternatively, Ashford Co can lease the equipment from Sysford, Inc. for annual beginning of year lease payments of $60,000 for five years. Ashford's interest rate on its secured debt is 8% and its tax rate is 25%. Sysford's interest rate is also 8%, but its tax rate is 20%.
a) Should Ashford Company buy or lease the equipment?
b) Establish range of lease payments that will be acceptable to both Ashford and Sysford.
3. Assume a company receives cash from different geographic areas of $300,000 daily. The average float of the cash receipt is 4 days. Interest rate on savings is 6% per year. If the company institutes a lock-box system, it will reduce the float to two days. It will cost $80,000 to install the lock-box system and an additional monthly fee of $2,000 to operate it. Should the company install the lock-box system?
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- Baghibenarrow_forwardRevenues generated by a new fad product are forecast as follows: Year Revenues $45,000 1 2 35,000 3 25,000 4 20,000 Thereafter 0 Expenses are expected to be 40% of revenues, and working capital required in each year is expected to be 20% of revenues in the following year. The product requires an immediate investment of $60,000 in plant and equipment.arrow_forwardA project’s annual revenues will be $50,000 the first year and will decrease by $1500 per year over its 20-year life. If the firm’s interest rate is 12%, what is the project’s present worth? (a) $305,998 (b) $373,450 (c) $384,654 (d) $440,902.arrow_forward
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- Jasper Corp. is considering the introduction of a new product that would require investments of $425,000, $200,000 and $160,000 at the end of each of the next three years, respectively. The annual profit expected from the new product is forecast to be $90,000 for Years 1 to 5, and $110,000 for Years 6 to 10. The company’s cost of capital is 6.5% compounded annually.a) What is the NPV of the proposed product? (Negative values should be indicated by a minus sign. Do not round your intermediate calculations. Round your final answer to 2 decimal places.)NPV $ b) Should Jasper Inc. introduce the new product?arrow_forwardA proposed project has fixed costs of $48,000 per year. The operating cash flow at 11,000 units is $85,000 units. What is the new degree of operating leverage?arrow_forward
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