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Prob 17-1 Find the NPV and PI of a project that costs $1,500 and returns $800 in year one and $850 in year two. Assume the project’s cost of capital is 8 percent. PV of cash inflows PV of cash outflows NPV PI Prob 17-5 5. For the following projects, compute NPV, IRR, MIRR, profitability index, and payback. If these projects are mutually exclusive, which one(s) should be done? If they are independent, which one(s) should be undertaken? A B C D Year 0 ($1,000) ($1,500) ($500) ($2,000) Year 1 $ 400 $ 500 $ 100 $ 600 Year 2 $ 400 $ 500 $ 300 $ 800 Year 3 $ 400 $ 700 $ 250 $ 200 Year 4 $ 400 $ 200 $ 200 $ 300 Discount Rate 10% 12% 15% 8% A C Years cash flow cumulative cash flow cumulative 0 0 -1000 0 -500 1 363.6363636 -636.364 86.95652 -413.043 2 330.5785124 -305.785 226.8431 -186.2 3 300.5259204 -5.2592 164.3791 -21.8213 4 273.2053821 267.9462 114.3506 92.52933 NPV PI IRR MIRR Payback If projects are mutually exclusive then we would have to choose between A and C and we would choose A because of higher NPV. If they are independent we would choose both A and C. Payback Prob 18-1 AQ&Q has EBIT of $2 million, total assets of $10 million, stockholders’ equity of $4 million, and pretax interest expense of 10 percent. a. What is AQ&Q’s indifference level of EBIT? Indifference level of EBIT b. Given its current situation, might it benefit from increasing or decreasing its use of debt? Current EBIT Explain. c. Suppose we are told AQ&Q’s average tax rate is 40 percent. How does this affect your answers to (a) and (b)? Prob 18-9 The following are balance sheets for the Genatron Manufacturing Corporation for the years 2010 and 2011: BALANCE SHEET 2010 2011 Cash $ 50,000 $ 40,000 Accounts receivable $ 200,000 $ 260,000 Inventory $ 450,000 $ 500,000 Total current assets $ 700,000 $ 800,000 Fixed assets (net) $ 300,000 $ 400,000 Total assets $ 1,000,000 $ 1,200,000 Bank loan, 10% $ 90,000 $ 90,000 Accounts payable $ 130,000 $ 170,000 Accruals $ 50,000 $ 70,000 Total current liabilities $ 270,000 $ 330,000 Long-term debt, 12% $ 300,000 $ 400,000 Common stock, $10 par $ 300,000 $ 300,000 Capital surplus $ 50,000 $ 50,000 Retained earnings $ 80,000 $ 120,000 Total liabilities and equity $ 1,000,000 $ 1,200,000 a. Calculate the weighted average cost of capital based on book value weights. Assume an after-tax cost of new debt of 8.63 percent and a cost of common equity of 16.5 percent. WACC b. The current market value of Genatron’s long-term debt is $350,000. The common stock price is $20 per share and there are 30,000 shares outstanding. Calculate the WACC using market value weights and the component capital costs in (a). Total equity wd we WACC c. Recalculate the WACC based on both book value and market value weights assuming that the before-tax cost of debt will be 18 percent, the company is in the 40 percent income tax bracket, and the after-tax cost of common equity capital is 21 percent. kd ke Book value WACC Market value WACC

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