Barney wants to increase the production rate in the Pebble Tech Manufacturing plant by adding a new machine. Calculate the NPV for the following capital budgeting proposal: $200,000 initial cost, to be depreciated straight line over five years to an expected salvage value of $10,000. Resale value of the machine is expected to be $11,000. The tax rate is 35% tax rate. %85,000 additional annual revenues, $33,000 additional expense, $10,000 additional investment in working capital. What is the projected cash flow for year 0? What is your projected cash flow for year 2? what is your projected cash flow for year 5?
2. A firm is considering a project with an IRR of 8%. The firm's cost of debt is 6%, its cost of equity is 13%, and its marginl tax rate is 23%. The firm's debt ratio (D/V), in market values is 0.5, and its proportion of equity (E/V) is also 0.5. The firm shoud?
A. reject the project regardless of the financing method
B. accept the project regardless of the financing method
C. accept the project only if it can be financed entirely with equity
D. accept the project only if it can be financed entirely with debt
3.Decreases in the risk free rate will reduce:
A. The market risk premium
B. the stock's risk premium
C. the Stock's beta
D. The stock's expected return?
4.The ABC company has 3 million shares of common stock outstanding at a book value of $3 per share. The stock trades for $4.00 per share. IT also has $3 million in face value of debt that trades at 80% of par. The company has no other important sources of financing. What is its appropriate debt ratio (D/V) to use when calculating the WACC?
5. According to the CAPM, a stock's risk premium is equal to the
A. expected market return times beta
B. Treasury bill yield plus expected market return.
C. risk-free rate plus expected market risk premium
D. expected market risk premium times beta
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