Concept explainers
a)
To determine:
a)

Explanation of Solution
Given information:
Annual output is 100,000 tons
Operating cost are $0.90 per ton
Sale price is $1 per ton.
Cost of capital is 10%.
Calculation of net
Net present value of such plant is probably going to zero, as a result of industry is competitive and, after two years no company would enjoy the technical benefits.
The present value of each of these plants would be $100,000 the cost is $100,000 and net present value is zero.
b)
To determine: Price of polysyllabic acid in 3 year and beyond
b)

Explanation of Solution
Calculation of price by using net present value of new plant:
Therefore, the price of polysyllabic acid is $0.95
c)
To determine: Present value when the scrap value is $40,000 and $80,000 in 2 year.
c)

Explanation of Solution
Calculation of net present value at year 2:
Therefore, when the existing plant can be scrapped at t=2 as long as the value of scrap at that point exceeds $50,000 that it’s expected to be.
d)
To discuss: Whether company U operate plants profitably after year 2 when plant is fully
d)

Explanation of Solution
Person X views that, company doesn’t operate them in profitably because book value is irrelevant and the net present value of the existing plant is negative after the second year.
e)
To discuss: Whether company scrap the new plant in year 2
e)

Explanation of Solution
Person X views that, company should scrap the newly purchased plant in year 2 because sunk costs are irrelevant and the net present value of the existing plant is negative after the second year.
f)
To determine: Net present value.
f)

Explanation of Solution
Company P’s project causes temporary excess capacity. Therefore the price for future 2 years should be specified the prevailing plant owners are indifferent between scrapping currently and scrapping at the end of 2 year.
Scrap value is $60,000 and also it is equal to present values of future cash flows. Therefore,
Calculation of net present value:
By using this value of price we can calculate the present value of new plant,
Calculation of present value of new plant:
Therefore present value of new plant is $3,470.
Want to see more full solutions like this?
Chapter 11 Solutions
PRINCIPLES OF CORPORATE FINANCE
- I mistakenly submitted blurr image please don't answer . comment please i will write values.arrow_forwardAssume that the following statements of financial position are stated and a book value. Alpha Corporation Current Assets $15,000 Current Liabilities $5,400 Net Fixed Assets 39,000 Long-Term Debt 10,100 Equity 38,500 $54,000 $54,000 Beta Corporation Current Assets $3,600 Current Liabilities $1,400 Net Fixed Assets 6,700 Long-Term Debt 2,100 Equity 6,800 $10,300 $10,300 Suppose the fair market value of Beta’s fixed assets is $9,500 rather than the $6,700 book value shown. Alpha pays $17,300 for Beta and raises the needed funds through an issue of long-term debt. Construct the post-merger statement of financial position now, assuming that the purchase method of accounting is used.arrow_forwardThe shareholders of Barley Corporation have voted in favor of a buyout offer from Wheat Corporation. Information about each firm is given here: Barley Wheat Price/earnings ratio 13.5 21 Shares outstanding 90,000 210,000 Earnings $180,000 $810,000 Barley shareholders will receive one share of Wheat stock for every three shares they hold of Barley. Required What will the EPS of Wheat be after the merger? What will be the P/E ratio if the NPV of the acquisition is 0? What must Wheat feel is the value of the synergy between these two firms? Explain how your answer can be reconciled with the decision to go ahead with the takeover?arrow_forward
- Black Oil Company is trying to decide whether to lease or buy a new computer-assisted drilling system for its extraction business. Management has already determined that acquisition of the system has a positive NPV. The system costs $9.4 million and qualifies for a 25% CCA rate. The equipment will have a $975,000 salvage value in five years. Black Oil’s tax rate is 36%, and the firm can borrow at 9%. Cape Town Company has offered to lease the drilling equipment to Black Oil for payments of $2.15 million per year. Cape Town’s policy is to require its lessees to make payments at the start of the year. Suppose it is estimated that the equipment will have no savage value at the end of the lease. What is the maximum lease payment acceptable to Black Oil now?arrow_forwardSpace Exploration Technology Corporation (Space X), is an aerospace manufacturer that sells stock engine components and tests equipment for commercial space transportation. A new customer has placed an order for eight high-bypass turbine engines, which increase fuel economy. The variable cost is $1.6 million per unit, and the credit price is $1.725 million each. Credit is extended for one period, and based on historical experience, payment for about one out of every 200 such orders is never collected. The required return is 1.8% per period. Required Assuming that this is a one-time order, should it be filled? The customer will not buy if credit is not extended. What is the break-even probability of default in part 1? Suppose that customers who don’t default become repeat customers and place the same order every period forever. Further assume that repeat customers never default. Should the order be filled? What is the break-even probability of default?arrow_forwardSouth African Airlines is contemplating leasing a high-tech tracker for its fleet of airplanes. Leasing is a very common practice with expensive, high-tech equipment. The scanner costs $6.3 million and it qualifies for a 30% CCA rate. Because of the rapid progression of technology, the high-tech tracker will be valued at $0 in 4 years. You can lease it for $1.875 million per year for four years. Assume that assets pool remains open and payments are made at the end of the year. Assuming a tax rate of 37%. You can borrow at 8% pre-tax. Should you lease or buy?arrow_forward
- Black Oil Company is trying to decide whether to lease or buy a new computer-assisted drilling system for its extraction business. Management has already determined that acquisition of the system has a positive NPV. The system costs $9.4 million and qualifies for a 25% CCA rate. The equipment will have a $975,000 salvage value in five years. Black Oil’s tax rate is 36%, and the firm can borrow at 9%. Cape Town Company has offered to lease the drilling equipment to Black Oil for payments of $2.15 million per year. Cape Town’s policy is to require its lessees to make payments at the start of the year. What is the NAL for Black Oil Company? What is the maximum lease payment that would be acceptable to the company?arrow_forwardIceberg Corporation currently has an all-equity capital structure. The company is considering a new structure that holds 30% debt. There are 6,500 shares outstanding and the price per share is $45 today. EBIT is expected to remain at $29,000 per year forever. The interest rate on new debt is 8%, and there are no taxes. Required Justin, a shareholder of the firm, owns 100 shares of stock. What is his cash flow under the current capital structure, assuming the company has a dividend payout rate of 100%? What will Justin’s cash flow be under the proposed capital structure of the firm? Assume he keeps all 100 of his shares. Suppose the company does convert, but Justin prefers the current all-equity capital structure. Show how he could unlever his shares of stock to recreate the original capital structure.arrow_forwardCovehead Lighthouse Corporation is considering a change in its cash-only policy. The new terms would be net one period. Based on the following information, determine if Covehead Lighthouse should proceed or not. The required rate of return is 2.5% per period. Current Policy New Policy Price per unit $73 $75 Cost per unit $38 $38 Unit sales per month 3,280 3,390arrow_forward
- EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENTPrinciples of Accounting Volume 2AccountingISBN:9781947172609Author:OpenStaxPublisher:OpenStax College
- Cornerstones of Cost Management (Cornerstones Ser...AccountingISBN:9781305970663Author:Don R. Hansen, Maryanne M. MowenPublisher:Cengage LearningEssentials of Business Analytics (MindTap Course ...StatisticsISBN:9781305627734Author:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. AndersonPublisher:Cengage LearningIntermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage Learning




