You run a perpetual encabulator machine, which generates revenues averaging $28 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 13%. Your firm's long-term borrowing rate is 10%. Now you are approached by Studebaker Capital Corp., which proposes a fixed-price contract to supply raw materials at $14.00 million per year for 9 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

You run a perpetual encabulator machine, which generates revenues averaging $28 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 13%. Your firm's long-term borrowing rate is 10%. Now you are approached by Studebaker Capital Corp., which proposes a fixed-price contract to supply raw materials at $14.00 million per year for 9 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

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter12: Capital Budgeting: Decision Criteria

Section: Chapter Questions

Problem 21P: Your division is considering two investment projects, each of which requires an up-front expenditure...

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