(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 $220 million in the coming year. The firm plans on financing the expansion through the retention of $143 million in firm earnings and by borrowing the remaining $77 million. In return for helping sell the $77 million in new debt, the firm's investment banker charges a fee of 200 basis points (where one basis point 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 $221,571,429|. (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 $220 million in the coming year. The firm plans on financing the expansion through the retention of $143 million in firm earnings and by borrowing the remaining $77 million. In return for helping sell the $77 million in new debt, the firm's investment banker charges a fee of 200 basis points (where one basis point 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 $221,571,429|. (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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Five Star is considering leasing a building and buying the necessary equipment to operate a public warehouse. Alternatively, the company could use the funds to invest in $149,600 of 5% U.S. Treasury bonds that mature in 16 years. The bonds could be purchased at face value. The following data have been assembled: Cost of equipment Life of equipment Estimated residual value of equipment Yearly costs to operate the warehouse, excluding depreciation of equipment Yearly expected revenues-years 1-8 Yearly expected revenues-years 9-16 Required: Differential revenue from alternatives: Revenue from operating warehouse Revenue from investment in bonds Differential revenue from operating warehouse 1. Prepare a differential analysis report of the proposed operation of the warehouse for the 16 years as compared with present conditions. Five Star Proposal to Operate Warehouse. Differential cost of alternatives: Costs to operate warehouse ✓ $149,600 16 years $27,500 Cost of equipment less residual…
Management of Braden Boats, Inc. is considering an expansion in the firm’s product line that requires the purchase of an additional $162,000 in equipment with installation costs of $19,000 and removal expenses of $2,000 (Note: the removal expenses are considered terminal cash flows and not associated with the installation of the new equipment). The equipment and installation costs will be depreciated over five years using straight-line depreciation. The expansion is expected to increase earnings before depreciation and taxes as follows: Years 1 and 2 Years 3 and 4 Year 5 $ 80,000 $ 60,000 $ 50,000 The firm’s income tax rate is 30 percent and the weighted-average cost of capital is 18 percent. Based on the net present value method of capital budgeting, should management undertake this project? Use Appendix B to answer the question. Use a minus sign to enter a negative value, if any. Round your answer to the nearest dollar. NPV: $ The firm make the investment.
Disposable Containers Corp. (DCC) is considering a large plant expansion/modernization which will cost $98 million initially and another $62 million at the end of year 3. This project is expected to produce incremental after-tax profits of $29 million, $32 million, $26 million, $42 million, $40 million and $31 million to be received at the end of years 1, 2, 3, 4, 5 and 6 respectively. If the WACC is 9%, what is the project’s NPV? (Start by drawing a timeline.)
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…
Carson Trucking is considering whether to expand its regional service center in Moab, Utah. The expansion will require the expenditure of $10,000,000 on new service equipment and will generate annual net cash inflows by reducing operating costs by $2,500,000 per year for each of the next eight years. In year 8, the firm will also get back a cash flow equal to the salvage value of the equipment, which is valued at $1 million. Thus, in Year 8 the investment cash inflow will total $3,500,000. Calculate the project NPV using each of the following discount rates: A. 9 percent B. 11 percent C. 13 percent D. 15 percent in excel
(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.)
Carson Trucking is considering whether to expand its regional service center in Mohab, UT. The expansion requires the expenditure of $10,500,000 on new service equipment and would generate annual net cash inflows from reduced costs of operations equal to $2,000,000 per year for each of the next 9 years. In year 9 the firm will also get back a cash flow equal to the salvage value of the equipment, which is valued at $1.2 million. Thus, in year 9 the investment cash inflow totals $3,200,000. Calculate the project's NPV using a discount rate of 10%. If the discount rate is 10%, then the project's NPV is $____________
Cirice Corporation is considering opening a branch in another state. The operating cash flow will be $ 150, 400 a year. The project will require new equipment costing $592, 000 that would be depreciated on a straight-line basis to zero over the 6-year life of the project. The equipment will have a market value of $ 177,000 at the end of the project. The project requires an initial investment of $41,000 in net working capital, which will be recovered at the end of the project. The tax rate is 23 percent. What is the project's IRR? Multiple Choice 12.33% 17.06% 15.99% 15.67% 14.74%
The Odessa Supply Company is considering obtaining a loan from a sales finance company secured by inventories under a field warehousing arrangement. Odessa would be permitted to borrow up to $320,000 under such an arrangement at an annual interest rate of 10 percent. The additional cost of maintaining a field warehouse is $20,000 per year. Assume that there are 365 days per year. Determine the annual financing cost of a loan under this arrangement if Odessa borrows the following amounts: $320,000. Round your answer to two decimal places. % $240,000. Round your answer to two decimal places. %
A Colsen Communications is trying to estimate the first-year cash flow (at Year 1) for a proposed project. The assets required for the project were fully depreciated at the time of purchase. The financial staff has collected the following information on the project: eBook Sales revenues $10 million Operating costs 8 million Interest expense 3 million The company has a 25% tax rate, and its WACC is 12%. Write out your answers completely. For example, 13 million should be entered as 13,000,000. a. What is the project's operating cash flow for the first year (t 1)? Round your answer to the nearest dollar. b. If this project would cannibalize other projects by $1 million of cash flow before taxes per year, how would this change your answer to part a? Round your answer to the nearest dollar. The firm's OCF would now be $
(Related to Checkpoint 18.2) (Calculating the cost of short-term financing) The R. Morin Construction Company needs to borrow $110,000 to help finance the cost of a new $165,000 hydraulic crane used in the firm's commercial construction business. The crane will pay for itself in one year, and the firm is considering the following alternatives for financing its purchase: Alternative A. The firm's bank has agreed to lend the $110,000 at a rate of 13 percent. Interest would be discounted, and a 15 percent compensating balance would be required. However, the compensating-balance requirement is not binding on the firm because it normally maintains a minimum demand deposit (checking account) balance of $27,500 in the bank. Alternative B. The equipment dealer has agreed to finance the equipment with a 1-year loan. The $110,000 loan requires payment of principal and interest totaling $128,909. a. Which alternative should Morin select? b. If the bank's compensating-balance requirement had…
Laurel’s Lawn Care Ltd., has a new mower line that can generate revenues of $135,000 per year. Direct production costs are $45,000, and the fixed costs of maintaining the lawn mower factory are $17,500 a year. The factory originally cost $0.90 million and is being depreciated for tax purposes over 20 years using straight-line depreciation. Calculate the operating cash flows of the project if the firm’s tax bracket is 25%.

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