1. Assume a company with 40% debt and 60% equity capital structure is considering a project that requires initial investment of $1,000,000. The project's net operating cash flow for the first year is $50,000 and it grows at 15%, 12%, and 10% in subsequent three years. After that it grows at a constant 5% annual rate into perpetuity. The company's cost of debt is 8% and its cost of equity is 14%. Its marginal tax rate is 20%. a) Should this project be accepted assuming the company uses the same capital structure to finance it? b) Holding other things the same, what perpetual growth rate after year 4 will result in zero NPV for the project? 2. Ashford Company is considering an acquisition of a transport equipment that costs $250,000. The equipment has estimated economic life of 5 years. If acquired, the equipment depreciates to zero book value under the straight-line depreciation method. Alternatively, Ashford Co can lease the equipment from Sysford, Inc. for annual beginning of year lease payments of $60,000 for five years. Ashford's interest rate on its secured debt is 8% and its tax rate is 25%. Sysford's interest rate is also 8%, but its tax rate is 20%. a) Should Ashford Company buy or lease the equipment? b) Establish range of lease payments that will be acceptable to both Ashford and Sysford. 3. Assume a company receives cash from different geographic areas of $300,000 daily. The average float of the cash receipt is 4 days. Interest rate on savings is 6% per year. If the company institutes a lock-box system, it will reduce the float to two days. It will cost $80,000 to install the lock-box system and an additional monthly fee of $2,000 to operate it. Should the company install the lock-box system?
1. Assume a company with 40% debt and 60% equity capital structure is considering a project that requires initial investment of $1,000,000. The project's net operating cash flow for the first year is $50,000 and it grows at 15%, 12%, and 10% in subsequent three years. After that it grows at a constant 5% annual rate into perpetuity. The company's cost of debt is 8% and its
a) Should this project be accepted assuming the company uses the same capital structure to finance it?
b) Holding other things the same, what perpetual growth rate after year 4 will result in zero
2. Ashford Company is considering an acquisition of a transport equipment that costs $250,000. The equipment has estimated economic life of 5 years. If acquired, the equipment depreciates to zero book value under the straight-line
Alternatively, Ashford Co can lease the equipment from Sysford, Inc. for annual beginning of year lease payments of $60,000 for five years. Ashford's interest rate on its secured debt is 8% and its tax rate is 25%. Sysford's interest rate is also 8%, but its tax rate is 20%.
a) Should Ashford Company buy or lease the equipment?
b) Establish range of lease payments that will be acceptable to both Ashford and Sysford.
3. Assume a company receives cash from different geographic areas of $300,000 daily. The average float of the cash receipt is 4 days. Interest rate on savings is 6% per year. If the company institutes a lock-box system, it will reduce the float to two days. It will cost $80,000 to install the lock-box system and an additional monthly fee of $2,000 to operate it. Should the company install the lock-box system?
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