FIN 571 Week 6 Individual Assignment WileyPlus Problem Set. 100%. UOP, 2014.

NEW. Grade A. There are 5 questions total. Problem 10.14,11.20,11.24,12.24,13.11

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Problem 10.14
Briarcrest Condiments is a spice-making firm. Recently, it developed a new process for producing
spices. The process requires new machinery that would cost $1,898,570. have a life of five years, and
would produce the cash flows shown in the following table.
Problem 11.20
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
$2.40 million for land and $9.50 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 $5.08 million, $2.07 million
above book value. The farm is expected to produce revenue of $2.02 million each year, and annual
cash flow from operations equals $1.86 million. The marginal tax rate is 35 percent, and the
appropriate discount rate is 9 percent. Calculate the NPV of this investment.
Problem 11.24
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 Mountains opportunity cost of capital is 16.7 percent, and the
costs and values of investments made at different times in the future are as follows:
Problem 12.24
Chips 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. Chips 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 firms FCF for the
Problem 13.11
Capital Co. has a capital structure, based on current market values, that consists of 47 percent debt, 2
percent preferred stock, and 51 percent common stock. If the returns required by investors are 8
percent, 10 percent, and 17 percent for the debt, preferred stock, and common stock, respectively,
what is Capitals after-tax WACC? Assume that the firms marginal tax rate is 40 percent.



Problem 10.14
Briarcrest Condiments is a spice-making firm. Recently, it developed a new process for producing
spices. The process requires new machinery that would cost $1,898,570. have a life of five years, and
would produce the cash flows shown in the following table.
Year Cash Flow
1 $638,570
2 -288,714
3 838,587
4 1,090,311
5 846,262

What is the NPV if the discount rate is 12.45 percent? (Enter negative amounts using negative
sign e.g. -45.25. Round answer to 2 decimal places, e.g. 15.25.)
NPV is
$
183277.49


Solution


Problem 11.20
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
$2.40 million for land and $9.50 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 $5.08 million, $2.07 million
above book value. The farm is expected to produce revenue of $2.02 million each year, and annual
cash flow from operations equals $1.86 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

$
1876653.60



The project should be
accepted

.





Problem 11.24
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 Mountains opportunity cost of capital is 16.7 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 4,550 7,000

2 4,100 7,000

3 3,650 7,000

4 3,200 7,000

5 2,750 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:
NPV
0
= $
2000

NPV
1
= $
2099

NPV
2
= $
2129

NPV
3
= $
2108

NPV
4
= $
2049

NPV
5
= $
1964

Suggest when should Bell Mountain buy the new accounting system?
Bell Mountain should purchase the system in
year 2
.




Problem 12.24
Chips 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. Chips 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 firms FCF for the
year? (Round answers to nearest whole dollar, e.g. 5,275.)

At $20 per bottle the Chips FCF is $
38000
and at the new price Chips FCF is $
54002
.




Problem 13.11
Capital Co. has a capital structure, based on current market values, that consists of 47 percent debt, 2
percent preferred stock, and 51 percent common stock. If the returns required by investors are 8
percent, 10 percent, and 17 percent for the debt, preferred stock, and common stock, respectively,
what is Capitals after-tax WACC? Assume that the firms 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 =
11.13

%