# Speedy Delivery Systems can buy a piece of equipment that should provide an 6 percent return

-Speedy Delivery Systems can buy a piece
of equipment that should provide an 6 percent return and can be financed at 3
percent with debt. The CEO likes earning more than the cost of debt, and he
thinks this would be a good deal. The firm can also buy a machine that would
yield a 14 percent return but would cost 16 percent to finance through common
equity. Earning less than the cost of equity sounds bad to the CEO. Assume
debt and common equity each represent 50 percent of the firmâs capital
structure.

(a)

Compute the weighted average cost of

Weighted average cost of
capital

%

(b)

Which project(s) should be accepted?

Piece of equipment should be financed.

New machine should be financed.

is as follows:

Debt

35

%

Preferred stock

30

Common equity

35

The aftertax cost of debt is 10 percent,
the cost of preferred stock is 13 percent, and the cost of common equity (in
the form of retained earnings) is 16 percent.

cost of each source of capital and the weighted average cost of capital. (Round
response.)

Weighted cost

Debt (Kd)

%

Preferred stock (Kp)

Common equity (Ke)

Weighted average cost of
capital (Ka)

%

-Assume a \$260,000 investment and the
following cash flows for two products:

Year

Product X

Product Y

1

\$

90,000

\$

80,000

2

80,000

70,000

3

80,000

50,000

4

40,000

80,000

(a)

Calculate the payback for products X and

Payback period

Product X

years

Product Y

years

(b)

Which alternative would you select under
the payback method?

Product X

Product Y

-Hamilton Control Systems will invest
\$99,000 in a temporary project that will generate the following cash inflows
for the next three years. Use .mhhe.com/connect/0073530727/Images/Appendix_B.jpg” title=”Appendix B”>Appendix B.

Year

Cash flow

1

\$

37,000

2

34,000

3

95,000

The firm will also be required to spend
\$18,000 to close down the project at the end of the three years.

(a)

Compute the net present value if the cost
of capital is 11 percent. (Round “PV Factor” to 3 decimal
should be indicated by a minus sign. Omit the “\$” sign in your
response.)

Net present value

\$

(b)

Should the investment be undertaken?

No

Yes

-Diaz Camera Company is considering two
investments, both of which cost \$30,000. The cash flows are as follows:

Use .mhhe.com/connect/0073530727/Images/Appendix_B.jpg” title=”Appendix B”>Appendix B.

Year

Project A

Project B

1

\$

15,000

\$

14,000

2

15,000

14,000

3

6,000

11,000

(a-1)

Calculate the payback period for project

Payback period

Project A

years

Project B

years

(a-2)

Which of the two projects should be
chosen based on the payback method?

Project A

Project B

(b-1)

Calculate the net present value for
project A and project B. Assume a cost of capital of 8 percent. (Round
“PV Factor” to 3 decimal places, intermediate and final answers to

Net present value

Project A

\$

Project B

\$

(b-2)

Which of the two projects should be
chosen based on the net present value method?

Project B

Project A

(c)

Should a firm normally have more
confidence in answer derived based on Net present value method or Payback
method?

Payback method

Net present value method

-Kingâs Department Store is contemplating
the purchase of a new machine at a cost of \$28,552. The machine will provide
\$4,600 per year in cash flow for 11 years. Kingâs has a cost of capital of 9
percent. Use .mhhe.com/connect/0073530727/Images/Appendix_D.JPG” title=”Appendix D”>Appendix D.

(a)

What is the internal rate of return? (Round
“PV Factor” to 3 decimal places. Round your answer to the nearest

Internal rate of return

%

(b)

Should the project be undertaken?

No

Yes

-Wildcat Oil Company was set up to take
large risks and is willing to take the greatest risk possible. Richmond
Construction Company is more typical of the average corporation and is
risk-averse.

Projects

Returns:
Expected value

Standard
deviation

A

\$

320,000

\$

149,000

B

693,000

435,000

C

187,000

152,000

D

145,000

234,000

(a-1)

Compute the coefficients of variation. (Round

Coefficient of
variation

Project A

Project B

Project C

Project D

(a-2)

Which of the following four projects
should Wildcat Oil Company choose?

Project A

Project B

Project C

Project D

(b)

Which one of the four projects should
Richmond Construction Company choose based on the same criteria of using the
coefficient of variation?

Project A

Project B

Project C

Project D

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