NPV
- Based on the following information, should we undertake the project to improve its production
efficiency? Why or why not?
- Project A requires an initial fixed asset investment of $410,000, which is estimated to result
in $155,000 in annual pretax cost savings. The project has a 4-year life. The fixed asset falls in
the MACRS 5-year class with the information given in the table below, and it will have a salvage
value at the end of the project of $55,000. The project also requires an initial investment in
inventory of $20,000, along with an additional $3,100 in inventory for each succeeding year of
the project. The inventory will return to its original level when the project ends. The Shop’s
tax rate is 35% and its discount rate is 9%.
MACRS Table 5 years
Year
MACRS percentage
1
20.00%
2
32.00%
3
19.20%
4
11.52%
5
11.52%
6
5.76%
RETURN OF A STOCK PORTFOLIO
State of
economy
Probability of
state of
economy
Rate of return if state occurs
Stock A
Stock B
Stock C
Boom
0.25
0.21
0.36
0.55
Normal
0.6
0.17
0.13
0.09
Burst
0.15
0.00
-0.28
-0.45
A portfolio is invested 40% each in Stock A and Stock B and 20% in Stock C. What is the expected
risk premium on the portfolio if the expected T-bill rate is 3.8%? What is the portfolio’s total
risk?
COST OF EQUITY
ABC Company has an unlevered cost of capital of 20%, a tax rate of 34% and expected earnings
before interests and taxes of $1,510.52. The company has $5,000 in bonds outstanding that
have a 10% coupon and pay interest annually. The bonds are selling at par value. What is the
cost of equity?
EAR
A supplier grants your firm credit terms of 2/10, net 30. What is the effective annual rate of
the discount if the firm purchases $6,000 worth of merchandise?