1)You are considering a project that will cost you $16,000,000 initially. Your cost of capital for this project is 8%. There is a 80% probability that the project will generate cash flows of $2,000,000 per year in perpetuity, and a 20% probability that the project will generate cash flows of $500,000 per year in perpetuity. If you could sell the project at the end of the first year for $6,950,724, what is the value of this abandonment option today? 2)Your firm has weights of debt (wD) and equity (wS) of 0.25 and 0.75, respectively. The cost of debt (rD) is 6% per year and the cost of equity (rS) is 17% per year. What is your firm's pre-tax Weighted Average Cost of Capital (WACC)? 3)You are a subcontractor bidding on a contract to provide car batteries to be sold at WalMart stores throughout Ohio for three years. You wish to enter a bid price that makes your NPV exactly $0. You have completed Steps 1-3 of the process explained at the end of the Chapter 11 slides and you find that you need to generate an annual OCF of $275,587.20 to get exactly NPV=0. Solve for the price per battery that you need to charge using the following information: Quantity: 11,226 batteries per year Variable costs: $37 per battery Fixed costs: $585,000 per year Tax rate: 21% Depreciation: $200,000 per year 4) A firm just issued bonds at par with a market value of $251 million. This will be permanent debt. The cost of debt, rD, is 10.07%. The firm's tax rate is 21%. What is the present value of the interest tax shield, PV(ITS)? Assume that rD is also the appropriate discount rate for the cash flows.

Principles of Accounting Volume 2

19th Edition

ISBN:9781947172609

Author:OpenStax

Publisher:OpenStax

Chapter11: Capital Budgeting Decisions

Section: Chapter Questions

Problem 2PA: Jasmine Manufacturing is considering a project that will require an initial investment of $52,000...

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1)You are considering a project that will cost you $16,000,000 initially. Your cost of capital for this project is 8%. There is a 80% probability that the project will generate cash flows of $2,000,000 per year in perpetuity, and a 20% probability that the project will generate cash flows of $500,000 per year in perpetuity. If you could sell the project at the end of the first year for $6,950,724, what is the value of this abandonment option today?

2)Your firm has weights of debt (wD) and equity (wS) of 0.25 and 0.75, respectively. The cost of debt (rD) is 6% per year and the cost of equity (rS) is 17% per year. What is your firm's pre-tax Weighted Average Cost of Capital (WACC)?

3)You are a subcontractor bidding on a contract to provide car batteries to be sold at WalMart stores throughout Ohio for three years. You wish to enter a bid price that makes your NPV exactly $0. You have completed Steps 1-3 of the process explained at the end of the Chapter 11 slides and you find that you need to generate an annual OCF of $275,587.20 to get exactly NPV=0. Solve for the price per battery that you need to charge using the following information:

Quantity: 11,226 batteries per year

Variable costs: $37 per battery

Fixed costs: $585,000 per year

Tax rate: 21%

Depreciation: $200,000 per year

4) A firm just issued bonds at par with a market value of $251 million. This will be permanent debt. The cost of debt, rD, is 10.07%. The firm's tax rate is 21%. What is the present value of the interest tax shield, PV(ITS)? Assume that rD is also the appropriate discount rate for the cash flows.

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