The Titanic Shipbuilding Company has a noncancelable contract to build a small cargo vessel Construction involves a cash outlay of$271,000 at the end of each of the next two years. At the end of the third year, the company will receive payment of $645,000.The company can speed up construction by working an extra shift. In this case, there will be a cash outlay of $585,000 at the end ofthe first year followed by a cash payment of $645,000 at the end of the second year. Use the IRR rule to show the (approximate) rangeof opportunity costs of capital at which the company should work the extra shift.Note: Enter your answers as a percent rounded to 2 decimal places. Enter the smallest percent first.The company should work the extra shit the cost of capital is between

IRR of a project is the discount rate which makes net present value of the project equal to…

Answered: The Titanic Shipbuilding Company has a…

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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Mowbot Company is evaluating the production of a new part. It would require the acquisition of a special CNC lathe costing $375,000. The machine would be used for five years then sold for $135,000. Mowbot’s MARR is 18%. In addition to the sales quotation, the sales representative has quoted a five year lease for $81,000 per year, with the first year’s payment due on delivery. Based on pretax analysis, should Mowbot choose leasing or buying?
The Titanic Shipbuilding Company has a noncancelable contract to build a small cargo vessel. Construction involves a cash outlay of $270,000 at the end of each of the next two years. At the end of the third year, the company will receive payment of $620,000. The company can speed up construction by working an extra shift. In this case, there will be a cash outlay of $584,000 at the end of the first year followed by a cash payment of $620,000 at the end of the second year. Use the IRR rule to show the (approximate) range of opportunity costs of capital at which the company should work the extra shift. Note: Enter your answers as a percent rounded to 2 decimal places. Enter the smallest percent first. The company should work the extra shift if the cost of capital is between % and %.
Wildhorse Company manufactures a check-in kiosk with an estimated economic life of 10 years and leases it to Sheffield Chicken for a period of 9 years. The normal selling price of the equipment is $172,124, and its unguaranteed residual value at the end of the lease term is estimated to be $26,200. Sheffield will pay annual payments of $20,800 at the beginning of each year. Wildhorse incurred costs of $141,100 in manufacturing the equipment and $2,400 in sales commissions in closing the lease. Wildhorse has determined that the collectibility of the lease payments is probable and that the implicit interest rate is 5%. Sheffield Chicken has an incremental borrowing rate of 5%. The lessor's implicit rate is unknown to the lessee.
On January 3, 2020, Gagne Inc. paid $320,000 for a computer system. In addition to the basic purchase price, the company paid a setup fee of $2,500, $6,400 sales tax, and $21,100 for special installation. Management estimates that the computer will remain in service for five years and have a residual value of $20,000. The computer will process 50,000 documents the first year, decreasing annually by 5,000 during each of the next four years (that is 45,000 documents in 2021, 40,000 documents is 2022, and so on). In trying to decide which depreciation method to use, the company president has requested a depreciation schedule for each of three depreciation methods (straight-line, units-of-production, and double-diminishing-balance). Before completing the straight-line depreciation schedule, calculate the straight-line depreciation rate. First, select the labels for the formula and then compute the rate. (Round the rate to two decimal places.) Date January 3, 2020 December 31, 2020 December…
Jeff Heun, president of Wildhorse Always, agrees to construct a concrete cart path at Dakota Golf Club. Wildhorse Always enters into a contract with Dakota to construct the path for $233,000. In addition, as part of the contract, a performance bonus of $42,800 will be paid based on the timing of completion. The performance bonus will be paid fully if completed by the agreed-upon date. The performance bonus decreases by $10,700 per week for every week beyond the agreed-upon completion date. Jeff has been involved in a number of contracts that had performance bonuses as part of the agreement in the past. As a result, he is fairly confident that he will receive a good portion of the performance bonus. Jeff estimates, given the constraints of his schedule related to other jobs, that there is 55% probability that he will complete the project on time, a 30% probability that he will be 1 week late, and a 15% probability that he will be 2 weeks late. a.) Determine the transaction…
A firm enters into an 8-year contract for materials that cost $90,000 initially and $30,000/yr beginning at the end of the 4th year. The company decides to make a lump sum payment at the end of year 2 to pay off the remainder of the contract. What lump sum is necessary at 8% interest?
Covidam Company clinches a contract to supply cleaning services to a nursing home for the next 5 years. Under the contract, the Company will be paid $1 million a year. To take up this contract, it would have to invest in new cleaning equipment costing $600,000 which will be depreciated straight line to zero over 5 years. There is no salvage value at the end of 5 years. Labour cost will be $300,000 per year and overheads $250,000per year. The Company will need to invest in net working capital of $350,000. It plans to issue $1 million worth of bonds for 5 years at a coupon rate of 6% and will price the bonds at par. The Company has an existing bank loan of $9 million. The cost of debt from the bank loan is the same as the bonds. The common stock of the Company is selling for $10 per share and it has 2 million shares outstanding. Expected dividend next year is $1 per share and dividends are expected to grow at 2% per annum into the foreseeable future. The tax rate is 20%.(a) Determine the…
Xtra Mechanical, Inc. is a manufacturer of machine parts with locations in the United States. It is considering entering into an eight year supply agreement with a customer where it will supply certain parts to the customer for their products. The project will require Xtra to purchase a new machine at the begining of the project and the cost of the machine is $8,500,000. At the end of the project, the machine is expected to be sold in the used market for 20% of the original cost before paying taver. The five year MACRS depreciation will be used for tax purposes. The depreciate rates are shown below. There is an initial networking capital investment of $15,000 and no further investment in not working capital is required. We assume that all the money tied up in the networking capital account will be recovered by the end of the project Revenues from the contract per year are shown below. Cost of goods sold is expected to be 50% of revenues. In addition to cost of goods seld, the project…
Jeff Heun, president of Larkspur Always, agrees to construct a concrete cart path at Dakota Golf Club. Larkspur Always enters into a contract with Dakota to construct the path for $191000. In addition, as part of the contract, a performance bonus of $48,000 will be paid based on the timing of completion. The performance bonus will be paid fully if completed by the agreed-upon date The performance bonus decreases by $12,000 per week for every week beyond the agreed-upon completion date. Jeff has been involved in a number of contracts that had performance bonuses as part of the agreement in the past. As a result, he is fairly confident that he will receive a good portion of the performance bonus. Jeff estimates, given the constraints of his schedule related to other jobs, that there is 55% probability that he will complete the project on time, a 30% probability that he will be 1 week late, and a 15% probability that he will be 2 weeks late. Determine the transaction price that Larkspur…
Covidam Company clinches a contract to supply cleaning services to a nursing home for the next 5 years. Under the contract, the Company will be paid $1 million a year. To take up this contract, it would have to invest in new cleaning equipment costing $600,000 which will be depreciated straight line to zero over 5 years. There is no salvage value at the end of 5 years. Labour cost will be $300,000 per year and overheads $250,000 per year. The Company will need to invest in net working capital of $350,000. It plans to issue $1 million worth of bonds for 5 years at a coupon rate of 6% and will price the bonds at par. The Company has an existing bank loan of $9 million. The cost of debt from the bank loan is the same as the bonds. The common stock of the Company is selling for $10 per share and it has 2 million shares outstanding. Expected dividend next year is $1 per share and dividends are expected to grow at 2% per annum into the foreseeable future. The tax rate is 20%. 1. Calculate…
A company that sells has proposed to a small public utility company that it purchase a small electronics computer for ₱1,000,000 to replace ten calculating machines and their operators. An annual service maintenance contract for the computer will be provided at a cost of ₱100, 000 per year. One operator will be required at a salary of ₱110, 000 per year and one programmer at a salary of ₱160, 000. The estimated economical life of the computer is 10 years. The calculating machines costs ₱8,000 each when new, 5 years ago, and presently can be sold for ₱2,000 each. They have an estimated life of 8 years and an expected ultimate trade in value of ₱1, 000 each. Each calculating machine operator receives ₱85, 000 per year. Fringe Benefits for all labour cost 8% of annual salary. Annual maintenance cost on the calculating machine has been ₱500 each. Taxes and insurance on all equipment is 2% of the first cost per year. If capital costs the company about 25%, would you recommend the computer…
Ovida company clinches a contract to supply cleaning services to a nursing home for the next 5 years. Under the contract, the company will be paid $1 million a year. To take up this contract, it would have to invest in new cleaning equipment costing $600,000 which will be depreciated straight-line to zero over 5 years. there is no salvage value at the end of 5 years. labour costs will be $300,000 per year and overheads $250,000 per year. the company will need to invest in net working capital of $350,000. it plans to issue $1 million worth of bonds for the next 5 years at a coupon rate of 6% and will price bonds at par. the company has an existing bank loan of $9 million. the cost of debt from a bank loan is the same as the bonds. the common stock of the company is selling for $10 per share and it has 2 million shares outstanding. expected dividend next year is $1 per share and dividends are expected to grow at 2% per annum. the tax rate is 20%. (a) compute the cost of equity b)…

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