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**Final **

**unit 8**

**all solutions with steps **

**Points Received:4 of 4**

**1.Question:**

**1. Blanchford Enterprises is considering a project that has the following cash flow and WACC data. What is the project\'s NPV? Note that a project\'s projected NPV can be negative, in which case it will be rejected.**

** WACC = 10%**

** Year: 0 1 2 3 4 **

** Cash flows: -$1,000 $475 $475 $475 $475**

**$482.16**

**$496.38**

**$505.69**

**$519.05**

**$524.72**

**Points Received:4 of 4**

**2.Question:**

**Tapley Dental Associates is considering a project that has the following cash flow data. What is the project\'s payback?**

** Year: 0 1 2 3 4 5 **

** Cash flows: -$1,000 $300 $310 $320 $330 $340**

**2.11 years**

**2.50 years**

**2.71 years**

**3.05 years**

**3.21 years**

**Points Received:4 of 4**

**3.Question:**

**Ryngaert Medical Enterprises is considering a project that has the following cash flow and WACC data. What is the project\'s NPV? Note that a project\'s projected NPV can be negative, in which case it will be rejected.**

** WACC = 10%**

** Year: 0 1 2 3 4 **

** Cash flows: -$1,000 $400 $405 $410 $415**

**$241.24**

**$255.83**

**$268.54**

**$274.78**

**$289.84**

**Points Received:4 of 4**

**4.Question:**

** Rockmont Recreation Inc. is considering a project that has the following cash flow data. What is the project\'s IRR? Note that a project\'s projected IRR can be less than the WACC (and even negative), in which case it will be rejected.**

** Year: 0 1 2 3 4 **

** Cash flows: -$1,000 $250 $230 $210 $190**

**-5.15%**

**-3.44%**

**-1.17%**

**2.25%**

**3.72%**

**Points Received:4 of 4**

**5.Question:**

**A company is analyzing two mutually exclusive projects, S and L, with the following cash flows:**

** 0 1 2 3 4**

**Project S -$1,000 $900 $250 $10 $10**

**Project L -$1,000 $0 $250 $$400 $800**

**The company\'s WACC is 10 percent. What is the IRR of the better project? (Hint: Note that the better project may or may not be the one with the higher IRR.)**

**Points Received:4 of 4**

**6.Question:**

**You must evaluate a proposal to buy a new milling machine. The base price is $108,000, and shipping and installation costs would add another $12,500. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $65,000. The applicable depreciation rates are 33, 45, 15 and 7 percent as discussed in Appendix 12A of your text book. The machine would require a $5,500 increase in working capital (increased inventory less increased accounts payable). There would be no effect on revenues, but pre-tax labor costs would decline by $44,000 per year. The marginal tax rate is 35 percent, and the WACC is 12 percent. Also, the firm spent $5,000 last year investigating the feasibility of using the machine.**

**How should the $5,000 spent last year be handled?**

**Points Received:4 of 4**

**7.Question:**

**You must evaluate a proposal to buy a new milling machine. The base price is $108,000, and shipping and installation costs would add another $12,500. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $65,000. The applicable depreciation rates are 33, 45, 15 and 7 percent as discussed in Appendix 12A of your text book. The machine would require a $5,500 increase in working capital (increased inventory less increased accounts payable). There would be no effect on revenues, but pre-tax labor costs would decline by $44,000 per year. The marginal tax rate is 35 percent, and the WACC is 12 percent. Also, the firm spent $5,000 last year investigating the feasibility of using the machine.**

**What is the net cost of the machine for capital budgeting purposes, that is, the Year 0 project cash flow?**

**Points Received:4 of 4**

**8.Question:**

**You must evaluate a proposal to buy a new milling machine. The base price is $108,000, and shipping and installation costs would add another $12,500. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $65,000. The applicable depreciation rates are 33, 45, 15 and 7 percent as discussed in Appendix 12A of your text book. The machine would require a $5,500 increase in working capital (increased inventory less increased accounts payable). There would be no effect on revenues, but pre-tax labor costs would decline by $44,000 per year. The marginal tax rate is 35 percent, and the WACC is 12 percent. Also, the firm spent $5,000 last year investigating the feasibility of using the machine.**

**What are the net operating cash flows during Years 1, 2 and 3?**

**Points Received:4 of 4**

**9.Question:**

**What is the terminal year cash flow?**

**Points Received:4 of 4**

**10.Question:**

**Should the machine be purchased? Explain your answer.**

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