# 12 the lower bound minimum possible value of a rate

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Chapter 12 / Exercise 12-5
Fundamentals of Financial Management, Concise Edition
Brigham/Houston
Expert Verified
12. The lower bound (minimum possible value) of a rate of return from buying any stock is _______. a) negative infinity b) –10000.00% c) –100.00% d) 0%
13. A pure play approach to estimating the cost of capital for a project refers to
14. Under the CAPM framework, what two elements are represented in security returns?
15. Which of the following is correct concerning real interest rates?
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Chapter 12 / Exercise 12-5
Fundamentals of Financial Management, Concise Edition
Brigham/Houston
Expert Verified
Question 1: Capital Budgeting (20 Marks) Gyson Corp manufactures highly sought after consumer vacuum cleaners. Gyson Corp's CEO has asked you to prepare a capital budgeting study for a proposed project to introduce a high-end version of the company's existing popular Clear-Klean vacuum. This new high-end vacuum will be manufactured using the same assembly line as the existing Clear-Klean vacuum, but the company will need to purchase additional new equipment for the assembly line at a cost of \$22 million. The equipment purchased qualifies for a 20% CCA rate, with annual depreciation calculated on a declining balance basis. The vacuum manufacturing industry is extremely competitive. As such, the expected life of the high-end Clear-Klean vacuum project is 6-years. The equipment purchased to facilitate this new project will be sold at the end of 6-years at an estimated salvage value equaling 20% of its original cost. The sales volume of the new vacuums are projected to be 100,000 units per year. The new vacuum will retail for \$340/unit and the variable costs of production is \$240/unit. The fixed cost of production associated with the previous generation of vacuum is \$2,000,000 per year. Production of the new high- end Clear-Klean vacuum will add \$850,000 to the company's annual fixed production costs. Ten percent of the company's existing annual \$750,000 marketing budget will be used to advertise the introduction of the new product. The company's annual after-tax operating income from the sale of the previous generation vacuums is expected to decline by \$500,000 per annum once this new vacuum is introduced. The overall allocated manufacturing overhead will remain constant, with the new high-end Clear-Klean vacuum absorbing \$2,000,000 of it per year.