(Related to Checkpoint 14.4) (Flotation costs and NPV analysis) The Faraway Moving Company is involved in a major plant expansion that involves the expenditure of $211 million in the coming year. The firm plans on financing the expansion through the retention of $142 million in firm earnings and by borrowing the remaining $69 million. In return for helping sell the $69 million in new debt, the firm's investment banker charges a fee of 150 basis points (where one basis point is 0.01 percent). If Faraway decides to adjust for these flotation costs by adding them to the initial outlay, what will the initial outlay for the project be? The flotation cost adjusted initial outlay is $. (Round to the nearest dollar.)

(Related to Checkpoint 14.4) (Flotation costs and NPV analysis) The Faraway Moving Company is involved in a major plant expansion that involves the expenditure of $211 million in the coming year. The firm plans on financing the expansion through the retention of $142 million in firm earnings and by borrowing the remaining $69 million. In return for helping sell the $69 million in new debt, the firm's investment banker charges a fee of 150 basis points (where one basis point is 0.01 percent). If Faraway decides to adjust for these flotation costs by adding them to the initial outlay, what will the initial outlay for the project be? The flotation cost adjusted initial outlay is $. (Round to the nearest dollar.)

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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Triad Corporation has established a joint venture with Tobacco Road Construction, Incorporated, to build a toll road in North Carolina. The initial investment in paving equipment is $149 million. The equipment will be fully depreciated using the straight - line method over its economic life of five years. Earnings before interest, taxes, and depreciation collected from the toll road are projected to be $22.7 million per annum for 20 years starting from the end of the first year. The corporate tax rate is 21 percent. The required rate of return for the project under all - equity financing is 15 percent. The pretax cost of debt for the joint partnership is 8.4 percent. To encourage investment in the country's infrastructure, the U.S. government will subsidize the project with a $70 million, 15-year loan at an interest rate of 4.9 percent per year. All principal will be repaid in one balloon payment at the end of Year 15. What is the adjusted present value of this project? (Do not round…
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The Podrasky Corporation is considering a $250 million expansion (capital expenditure) program next year. The company currently has $400 million in net fixed assets on its books. Next year, the company expects to earn $70 million after interest and taxes. The company also expects to maintain its present level of dividends, which is $20 million. If the expansion program is accepted, the company expects its inventory and accounts receivable each to increase by approximately $25 million next year. Long-term debt retirement obligations total $9 million for next year, and depreciation is expected to be $75 million. The company does not expect to sell any fixed assets next year. The company maintains a cash balance of $5 million, which is sufficient for its present operations. If the expansion is accepted, the company feels it should increase its year-end cash balance to $7 million because of the increased level of activities. For planning purposes, assume no other cash flow changes for next…
A company is considering two mutually exclusive expansion plans. Plan A requires a $40 million expenditure on a large-scale integrated plant that would provide expected cash flows of $6.39 million per year for 20 years. Plan B requires a $13 million expenditure to build a somewhat less efficient, more labor-intensive plant with an expected cash flow of $2.91 million per year for 20 years. The firm's WACC is 11%. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the questions below. Open spreadsheet Calculate each project's NPV. Round your answers to two decimal places. Do not round your intermediate calculations. Enter your answers in millions. For example, an answer of $10,550,000 should be entered as 10.55. Plan A: $ fill in the blank 2 million Plan B: $ fill in the blank 3 million Calculate each project's IRR. Round your answer to two decimal places. Plan A: fill in the blank 4%…
PCW Co is a listed company that operates in the automobile industry. Due to an increase in local demand for the company’s products, PCW Co decides to invest in a new machinery. Such an investment project requires some initial investment in working capital of $300,000. And the investment in working capital is subject to general inflation, which is forecasted to be 5% per annum. The cost of the new machine is $3 million. Each year, the new investment is estimated to generate 7,000 products and all of them are expected to be sold. For simplicity’s reason, there is no scrap value of the machine. The usual lifetime of the machinery would be 3 years, after which it is supposed to be replaced. The costs and selling price in current price terms are summarised as follows: Annual sector-specific inflation Variable costs. $100 / unit 6.0 % Incremental fixed costs $200,000 / year. 4.5 % Selling price $400 / unit…
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ABC Co needs to purchase equipment for $2 million. It is estimated that the after- tax cash inflows from the project will be $210,000 annually in perpetuity. ABC Co has a market value debt-to-assets ratio of 60%. The firm's cost of equity is 13%, its pre-tax cost of debt is 8%, and the flotation costs of debt and equity are 2% and 8%, respectively. The tax rate is 34%. Assume the project is of similar risk to the firm's existing operations. What is the dollar flotation cost for the proposed financing? $83,333 $88,000 $92,050 $79,840 $80,000
Leland Industries is a producer of bakery and snack goods in Western Canada and are considering expending into Eastern Canada. The expansion is estimated to cost $10,000,000 for a new production facility. This project is in the same line of business as the firm's current operations and is therefore not expected to alter the risk of the firm. The most recent balance sheet is provided below. Leland Industries Balance Sheet As at Dec 31, 2021 Assets Liabilities Accounts Payable Other Current Liabilities $ Cash & Marketable Securities 425,000 300,000 Accounts Receivable $ 400,000 425,000 Inventories 500,000 Total Current Liabilities 725,000 Total Current Assets $ 1,325,000 Net Fixed Assets 18,000,000 LT Debt * 6,500,000 Preferred Stock ** 2,500,000 Common Stock*** 3,000,000 Retained Earnings 6,600,000 Total Liabilities & Total Assets $ 19,325,000 Owners Equity $ 19,325,000 Notes to financial statements: * The 5% semi-annual coupon bonds have a face value of $1,000, were issued 5 years ago…
A company is considering two mutually exclusive expansion plans. Plan A requires a $41 million expenditure on a large-scale integrated plant that would provide expected cash flows of $6.55 million per year for 20 years. Plan B requires a $13 million expenditure to build a somewhat. less efficient, more labor-intensive plant with an expected cash flow of $2.91 million per year for 20 years. The firm's WACC is 10%. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the questions below. Open spreadsheet a. Calculate each project's NPV. Round your answers to two decimal places. Do not round your intermediate calculations. Enter your answers in millions. For example, an answer of $10,550,000 should be entered as 10.55. Plan A: $ Plan B: $ million Calculate each project's IRR. Round your answer to two decimal places. Plan A: Plan B: % % million % b. By graphing the NPV profiles for Plan A and Plan B,…
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A company is considering two mutually exclusive expansion plans. Plan A requires a $39 million expenditure on a large-scale integrated plant that would provide expected cash flows of $6.23 million per year for 20 years. Plan B requires a $12 million expenditure to build a somewhat less efficient, more labor-intensive plant with an expected cash flow of $2.69 million per year for 20 years. The firm's WACC is 10%. Calculate each project's NPV. Enter your answers in millions. For example, an answer of $10,550,000 should be entered as 10.55. Do not round intermediate calculations. Round your answers to two decimal places. Plan A: $. million Plan B: $ million Calculate each project's IRR. Round your answers to one decimal place. Plan A: % Plan B: % By graphing the NPV profiles for Plan A and Plan B, determine the crossover rate. Round your answer to one decimal place. % Calculate the crossover rate where the two projects' NPVs are equal. Round your answer to one…

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