Your factory has been offered a contract to produce a part for a newprinter. The contract would last for three years, and your cash flows fromthe contract would be $5.15 million per year. Your upfront setup costs tobe ready to produce the part would be $7.75 million. Your discount ratefor this contract is 8.2%a. What does the NPV rule say you should do?b. If you take the contract, what will be the change in the value ofyour firm?

The profitability of the project is gauged by the NPV benefit, which is used to determine if a…

Answered: Your factory has been offered 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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discount rate for this contract is 7.5%. Your factory has been offered a contract to produce a part for a new printer. The contract would last for 3 years and your cash flows from the contract would be $4.86 million per year. Your upfront setup costs to be ready to produce the part would be $8.04 million. Your a. What does the NPV rule say you should do? b. If you take the contract, what will be the change in the value of your firm? a. What does the NPV rule say you should do? The NPV of the project is $ million. (Round to two decimal places.)
You are the CFO for a major hospital and must decide whether you want to Lease or Buy a new diagnostic scanner. If the cost is $5MM and you can depreciate it (straight line) over 4 years with a zero residual value. If the annual Lease Payments are $1.4MM/year, what are your future annual cash flows ( assuming a 21% tax rate) for the hospital? Make sure you do not add any dollar signs or commas to your answer. Just put in the whole number of dollars
You are trying to decide between two mobile phone carriers. Carrier A requires you to pay$185 for the phone and then monthly charges of $54 for 24 months. Carrier B wants you to pay $105 for the phone and monthly charges of $68 for 12 months. Assume you will keep replacing the phone after your contract expires. Your cost of capital is 3.9%APR, compounded monthly. Based on cost alone, which carrier should you choose? The EAA for plan A isThe EAA for plan B isThe EAA for plan C is
You are considering purchasing an investment contract that will eventually pay you $4,000 per year at the end of each year for seven years. The appropriate interest rate for the risks involved is 6.4% The first payment begins in 6 years. What price should you pay today to purchase this contract (rounded to nearest dollar) ? (Do not round interim calculations)
Suppose you can buy a new Toyota corolla for $20000 and sell it for $12000 in third year. For simplication, assume you sell the car at the beginning of the third year but can keep driving it until the end of the third year. Alternatively you can lease the car for $300 per month for three years and return it at the end of the three years. For simplication, assume that lease payments are made yearly instead of monthly- i.e,, that they are $3600 per year and are made at the beginning of each of the three years. a. If the interest rate R is 4%, it is better to buy or lease? b. If the interest rate is 10%,it is better to buy or lease? c. At what interest rate would you be indifferent between buying and leasing the car in percent?
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2. You have just been offered a contract worth $1.00 million per year for 5 years. However, to take the contract, you will need to purchase some new equipment. Your discount rate for this project is 12.0%. You are still negotiating the purchase price of the equipment. What is the most you can pay for the equipment and still have a positive NPV? **round to two decimal places**
New Tech Corporation is a rapidly growing biotech company that has a required rate of return of 10%. It plans to build a new facility in Santa Clara County. The building will take 2 years to complete. The building contractor offered. New Tech a choice of three payment plans, as follows:.1. Using the net present value method, calculate the comparative cost of each of the three payment plans being considered by New Tech.(Round your final answers to the nearest whole dollar.) The net present value cost of Plan I is .The net present value cost of Plan II isThe net present value cost of Plan III is 2. Which payment plan should New Tech choose? Explain. 3. Discuss the financial factors, other than the cost of the plan, and the nonfinancial factors that should be considered in selecting an appropriate payment plan More info • Plan I: Payment of $225,000 at the time of signing the contract and $4,800,000 upon completion of the building. The end of the second year is the completion…
The technique for calculating a bid price can be extended to many other types of problems. Answer the following questions using the same technique as setting a bid price; that is, set the project NPV to zero and solve for the variable in question. Martin Enterprises needs someone to supply it with 155,000 cartons of machine screws per year to support its manufacturing needs over the next five years, and you've decided to bid on the contract. It will cost $1,950,000 to install the equipment necessary to start production; you'll depreciate this cost straight-line to zero over the project's life. You estimate that, in five years, this equipment can be salvaged for $165,000. Your fixed production costs will be $280,000 per year, and your variable production costs should be $10.90 per carton. You also need an initial investment in net working capital of $145,000. The tax rate is 25 percent and you require a return of 14 percent on your investment. Assume that the price per carton is $17.50.…
Heer Enterprises needs someone to supply it with 160,000 cartons of machine screws per year to support its manufacturing needs over the next three years, and you've decided to bid on the contract. It will cost you $840,000 to install the equipment necessary to start production and you estimate that it can be salvaged for $160,000 at the end of the three-year contract. Your fixed production costs will be $290,000 per year, and your variable production costs should be $8.50 per carton. If you require a 12 percent return on your investment, what is the minimum bid price you should submit?
You have been given a choice of paying $20,000 for a new GM car with a $3,000 cash rebate (net cost of $17,000 which you finance separately), or zero percent financing for 48 months with no cash rebate. What is the implicit rate of interest in this deal?

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