12zz - More Practice on Capital Budgeting - Answers.pdf - Use the following to answer the following questions Frozen Enterprises wants to expand its

12zz - More Practice on Capital Budgeting - Answers.pdf -...

This preview shows page 1 - 3 out of 8 pages.

1Use the following to answer the following questions. Frozen Enterprises wants to expand its business by selling ice coffee in addition to ice tea. The CFO of Frozen Enterprises is provided with the following information on the new project. > The company uses straight-line depreciation. The project has an economic life of 10 years. Total cost of the plant and equipment that will be required for the project is $4,500,000, which will be depreciated to a salvage value of $250,000 and sold for that amount in 10 years. > The sale of ice coffee will generate $2,500,000 in sales each year for the next 10 years. > Because of the expansion, operating costs will increase by $800,000 per year. > The company spent $600,000 on testing various coffee flavors. > The company will increase net working capital by $200,000 at the beginning of the project, and it will be liquidated at the end of the project. > Frozen Enterprises’ marginal tax rate is 40%. > Frozen Enterprises’ weighted average cost of capital (WACC) is 12%. oQuestion 1. What is the NPV of this project? NPV = 216865.3 oQuestion 2. What is the IRR of this project? IRR= 22.19
Background image
2Use the following to answer questions 3-7. BoeBus Air is considering increasing production of the 525 Airliner at their South Carolina assembly plant. You have been provided the following pieces of information. a.The expansion will require the purchase of machinery costing $50,000,000. b.The firm has spent $250,000 to train workers to use the new machinery. c.The sales from this project will be $18 million per year. d.Variable costs will increase by $3.6 million per year. e.The company uses straight-line depreciation. The project has an economic life of 20 years and the machinery will have a salvage value of $5,000,000. f.Because of the project, the company will need additional working capital of $3,500,000 which can be liquidated at the end of 20 years. g.BB’s stock price is $34.25. They just paid a dividend of $3 and the market consensus is for constant 3% dividend growth forever. h.BB’s bonds sell for $975. They pay semi-annually, have 7 years to maturity, a coupon rate of 4% and par value of $1,000. i.BB’s marginal tax rate is 40%. j.Their target capital structure is 60% equity and 40% debt. 3.BB’s WACC is ______%. a.8.175 b.8.274 c.8.363 d.8.452 e.8.561 4.The initial cash flow of the project is $_______ million.
Background image
Image of page 3

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture