Friendly Cards Inc - Elizabeth Christy Friendly Cards Inc...

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Elizabeth Christy June 25, 2011 Friendly Cards Inc William Mannaberg MBA 651-D5B1 Financial Management Friendly Cards Inc Friendly cards should invest in the envelope machine that would enable them to produce their own envelopes. The purchase of envelopes is a significant cost of Friendly’s operations, costing the company $1.5 million dollars a year, bringing the envelope manufacturing in house Friendly could greatly decrease their costs and increase the value of the firm as a project has a positive new present value. For the net present value, analysis it is assumed that production would not decrease over time and the expenses would remain constant, implying that the annual increase in profits provided by the investment would remain at $218,000 for all 8 years of the machine life. The rate of return of the project was assumed to be equal to the weighted average cost of capital for the firm as a whole. Cost of equity was calculated by taking the payout to shareholders in 1987 of
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$99,000 (Payout=Net income-retained earnings= 784,000-(1,990,000-1,305,000) =$99,000) divided by the market value of the firm plus the projected growth in dividends. Although the firm does not intend to pay out any dividends in the next three years it is assumed that in the long-run dividends will be increased by a rate equal to the growth in sales which is predicted to be 20%.
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