# FIn571 week 6 assignment

Problem 10.14

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Briarcrest Condiments is a spice-making firm. Recently, it developed a
new process for producing spices. The process requires new machinery that would
cost \$2,277,693. have a life of five years, and would produce the cash flows
shown in the following table.

Year

Cash Flow

1

\$623,861

2

-218,713

3

759,901

4

1,035,569

5

710,575

What is the NPV if the discount rate is 12.34 percent?(Enter negative amounts
using negative sign e.g. -45.25. Round answer to 2 decimal places, e.g. 15.25.)

NPV is

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Problem 11.20

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Archer Daniels Midland Company is considering buying a new farm that
it plans to operate for 10 years. The farm will require an initial investment
of \$11.90 million. This investment will consist of \$2.20 million for land and
\$9.70 million for trucks and other equipment. The land, all trucks, and all
other equipment is expected to be sold at the end of 10 years at a price of
\$5.01 million, \$2.19 million above book value. The farm is expected to produce
revenue of \$2.10 million each nyear, and annual cash flow from operations
equals \$1.98 million. The marginal tax rate is 35 percent, and the appropriate
discount rate is 9 percent. Calculate the NPV of this investment.(Round intermediate
calculations and final answer to 2 decimal places, e.g. 15.25.)

NPV

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The project should be

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accepted
rejected

.

Problem 11.24

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Bell Mountain Vineyards is considering updating its current manual
accounting system with a high-end electronic system. While the new accounting
system would save the company money, the cost of the system continues to
decline. The Bell Mountainâs opportunity cost of capital is 17.2 percent, and
the costs and values of investments made at different times in the future are
as follows:

Year

Cost

Value of Future
Savings
(at time of purchase)

0

\$5,000

\$7,000

1

4,100

7,000

2

3,200

7,000

3

2,300

7,000

4

1,400

7,000

5

500

7,000

Calculate
the NPV of each choice.(Round answers to the nearest whole dollar, e.g. 5,275.)
The NPV of each choice
is:
NPV0 = \$.gif”>
NPV1 = \$.gif”>
NPV2 = \$.gif”>
NPV3 = \$.gif”>
NPV4 = \$.gif”>
NPV5 = \$.gif”>
Suggest
when should Bell Mountain buy the new accounting system?

Bell Mountain should purchase the system in .gif”>

year 5
year 2
year 4
year 1
year 3
.

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Problem 12.24

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Chipâs Home Brew Whiskey management forecasts that if the firm sells
each bottle of Snake-Bite for \$20, then the demand for the product will be
15,000 bottles per year, whereas sales will be 86 percent as high if the price
is raised 17 percent. Chipâs variable cost per bottle is \$10, and the total
fixed cash cost for the year is \$100,000. Depreciation and amortization charges
are \$20,000, and the firm has a 30 percent marginal tax rate. Management
anticipates an increased working capital need of \$3,000 for the year. What will
be the effect of the price increase on the firmâs FCF for the year?(Round answers to nearest
whole dollar, e.g. 5,275.)

At \$20 per bottle the Chipâs FCF is \$.gif”>
and at the new price Chipâs FCF is \$.gif”>.

Problem 13.11

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Capital Co. has a capital structure, based on current market values,
that consists of 39 percent debt, 12 percent preferred stock, and 49 percent
common stock. If the returns required by investors are 9 percent, 12 percent,
and 18 percent for the debt, preferred stock, and common stock, respectively,
what is Capitalâs after-tax WACC? Assume that the firmâs marginal tax rate is
40 percent.(Round intermediate calculations to 4 decimal places, e.g. 1.2514
and final answer to 2 decimal places, e.g. 15.25%.)

After tax WACC

=

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%

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