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b. Calculate the present value of the encabulator machine with and without the fixed-price contract. (Do not round intermediate calculations. Enter your answers in dollars not in millions. Round your answers to the nearest whole dollar amount.) With contract Without contract $ Present Value 101,686,818

b. Calculate the present value of the encabulator machine with and without the fixed-price contract. (Do not round intermediate calculations. Enter your answers in dollars not in millions. Round your answers to the nearest whole dollar amount.) With contract Without contract $ Present Value 101,686,818

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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You run a perpetual encabulator machine, which generates revenues averaging $20 million per year. Raw material costs are 50% of revenues. These costs are variable-they are always proportional to revenues. There are no other operating costs. The cost of capital is 9%. Your firm's long-term borrowing rate is 6%. Now you are approached by Studebaker Capital Corp., which proposes a fixed-price contract to supply raw materials at $10 million per year for 10 years. a. What happens to the operating leverage and business risk of the encabulator machine if you agree to this fixed-price contract? Operating leverage and business risk increases Operating leverage and business risk decreases b. Calculate the present value of the encabulator machine with and without the fixed-price contract. (Do not round intermediate calculations. Enter your answers in dollars not in millions. Round your answers to the nearest whole dollar amount.) With contract Without contract $ Present Value 101,686,818
Transcribed Image Text:You run a perpetual encabulator machine, which generates revenues averaging $20 million per year. Raw material costs are 50% of revenues. These costs are variable-they are always proportional to revenues. There are no other operating costs. The cost of capital is 9%. Your firm's long-term borrowing rate is 6%. Now you are approached by Studebaker Capital Corp., which proposes a fixed-price contract to supply raw materials at $10 million per year for 10 years. a. What happens to the operating leverage and business risk of the encabulator machine if you agree to this fixed-price contract? Operating leverage and business risk increases Operating leverage and business risk decreases b. Calculate the present value of the encabulator machine with and without the fixed-price contract. (Do not round intermediate calculations. Enter your answers in dollars not in millions. Round your answers to the nearest whole dollar amount.) With contract Without contract $ Present Value 101,686,818
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