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14) Parappapa is considering an eight-year expansion project that requires an initial investment of \$423,000 for the purchase of a new capital asset

Hello,
I'm having trouble with questions 16 through 20 in the attached word document. My answers are 16)c, 17)b, 18)b, 19)d, 20)a.
However I state that with a lot of uncertainty.
Thank you,
Regards,
Dany

Page 7 of 10 14) Parappapa is c o nsid e ring an eig h t-y e a r ex p a nsi o n project that r e quir es an i ni ti al i nv es t m e n t of \$423,000 for the purchase of a new c a pi t al asset wi t h a CCA rate of 30 percent. Th e costs t o install the asset are \$27,000. T h e projected a nnu al sal es revenue and costs are \$1.2M a nd \$700,000 per year, r es p ec tiv ely. T h e a ppr o pri a t e disc o un t rate is 15 percent. T h e fi r m’s m a rgin al tax rate is 35 percent. What is the fourth year CCA ex p e ns e ? a) \$46,305.0 b) \$56,227.5 c) \$131,197.5 d) \$154,351.0 e) \$187,425.0 15) Genuess is i n t e r es t e d in a new eig h t-y e a r project. Th e project calls for an initial cash o u tl ay of \$1,000,000: \$650,000 for new e quip m e n t, \$25,000 for i ns t alla ti o n costs, and \$325,000 f o r a ddi ti o n al net working ca pi t al. T h e asset has a CCA rate of 25 percent and an expected s alvag e v al u e of \$95,000. T h e project will generate a ddi ti o n al o p e r a ti ng pr ofi t of \$325,000 per y e a r. What is the UCC at the end of year 3 ? a) \$106,641 b) \$110,742 c) \$319,922 d) \$332,227 e) None of the given c h oic es 16) Happy Flowers is c o nsid e ring the purchase of a new computer system for \$150,000. Th e asset has an ec o n o mic life of four years, a CCA rate of 45 percent, and expected s alvag e v al u e of \$12,000. T h e project als o r e quir es an i nv es t m e n t in net working c a pi t al of \$9,000. T h e project is expected to generate after-tax o p e r a ti ng inc o m e of \$80,000 per year. Ass u m e t h e asset class r e m ai ns open after the asset is s ol d. Th e fi r m’s cost of c a pi t al is 18 percent a nd m a rgin al tax rate is 40 percent. What is the NPV of the project? T h e net working c a pi t al is recaptured at the end of the project. (Disregard any t e r mi n al ca pi t al gai n /l oss) a) - \$31,085.31 b) \$94,319.64 c) \$103,774.63 d) \$422,119.63 e) None of the given c h oic es
Page 8 of 10 17) A m a nuf ac t uring company is c o nsid e ring purch asi ng a new m ac hin e to r e pl ac e the exis ti ng one to i m pr ov e pr o duc ti o n efficiency. Th e new m ac hin e will cost the company \$250,000 and is expected to sell for \$12,000 in nin e years. T h e ol d m ac hin e has a market v al u e of \$50,000 t o d ay and c o uld be s ol d for \$2,000 in ten years. B o t h m ac hin es have a CCA rate of 30 percent. Wi t h the new m ac hin e, the company expects \$50,000 savings in o p e r a ti ng expenses per year. Th e c o m p a ny’s tax rate is 40 percent and the cost of c a pi t al is 17 percent. What is the present val u e of the i ncr e m e n t al CCA tax savings generated by the r e pl ac e m e n t d ecisi o n? (choose the cl os es t a nsw e r). a) \$46,732.61 b) \$58,615.95 c) \$59,361.70 d) \$431,919.9 e) C a nn o t be d e t e r mi n e d from the giv e n 18) A firm has a c a pi t al structure that uses 45 percent e qui ty, 20 percent preferred shares, a nd 35 percent debt. T h e preferred shares have a current yield of 5.5 percent. T h e debt has a coupon rate of 10 percent and a current yield to m a t uri ty of 6.5 percent. T h e common s h a r es have a yield of 8 percent. T h e r e are no taxes. What is the fi r m’s WACC ? a) 6.575% b) 6.975% c) 7.275% d) 8.200% 19) My company has a D /E r a ti o of 0.85. T h e company has 1,000 shares o u tst a nding and a b e t a of 1.3. T h e risk-fr ee rate is 3.5 percent and the market risk pr e mi u m is 5.5 percent. T h e company has 8 year debt wi t h a face v al u e of \$1.2 million and a nnu al coupons of 4.2 p e rc e n t. T h e debt is c urr e n tly t r a ding at 103%. T h e tax rate is 35 percent. C alc ul a t e the weig h t e d average cost of c a pi t al for my company. (Use 2 d eci m al pl ac es for all i n t e ri m p e rc e n t ag e v al u es). a) 4.42% b) 5.02% c) 6.87% d) 7.48% e) None of these a nsw e rs
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