Category Archives: FIN 515 (NEW)

FIN 515 Week 7 Project Capital Budgeting Analysis (Nike)

FIN 515 Week 7 Project Capital Budgeting Analysis (Nike)

Once again, your team is the key financial management team for your company. The company’s CEO is now looking to expand its operations by investing in new property, plant, and equipment. Your team recently calculated the WACC for your company, which will now be useful in evaluating the project’s effectiveness. You are now asked to do some capital budgeting analysis that will determine whether the company should invest in these new plant assets.

 

The parameters for this project are:

Your team will be using the same company for this project that you used in the Week 6 project. The company is now looking to expand its operations and wants you to do some analysis using key capital budgeting tools to do this. The parameters for this project are as follows.

 

The firm is looking to expand its operations by 10% of the firm’s net property, plant, and equipment. (Calculate this amount by taking 10% of the property, plant, and equipment figure that appears on the firm’s balance sheet.)

 

The estimated life of this new property, plant, and equipment will be 12 years. The salvage value of the equipment will be 5% of the property, plant and equipment’s cost.

 

The annual EBIT for this new project will be 18% of the project’s cost.

 

The company will use the straight-line method to depreciate this equipment. Also assume that there will be no increases in net working capital each year. Use the same marginal tax rate that you used in the Week 6 project.

 

The hurdle rate for this project will be the WACC that you calculated in Week 6.

 

Deliverable for this Project

Prepare a narrated PowerPoint presentation using VoiceThread or Webex that will highlight the following items.

·         Your calculations for the amount of property, plant, and equipment and the annual depreciation for the project

·         Your calculations that convert the project’s EBIT to free cash flow for the 12 years of the project.

·         The following capital budgeting results for the project

o   Net present value

o   Internal rate of return

o   Discounted payback period.

·         Your discussion of the results that you calculated above, including a recommendation for acceptance or rejection of the project

 

Once again, you may embed your Excel spreadsheets into your document. Be sure to follow APA standards for this project.

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FIN 515 Week 7 Problem Set

FIN 515 Week 7 Problem Set

Chapter 26 (page 903):

Answer the following questions:

What is the difference between a firm’s cash cycle and its operating cycle?

How will a firm’s cash cycle be affected if a firm increases its inventory, all else being equal?

How will a firm’s cash cycle be affected if a firm begins to take the discounts offered by its suppliers, all else being equal?

The Greek Connection had sales of $32 million in 2012, and a cost of goods sold of $20 million. A simplified balance sheet for the firm appears below:
Calculate The Greek Connection’s net working capital in 2012.
Calculate the cash conversion cycle of The Greek Connection in 2012.

The industry average accounts receivable days is 30 days. What would the cash conversion cycle for The Greek Connection have been in 2012 if it had matched the industry average for accounts receivable days?

Assume the credit terms offered to your firm by your suppliers are 3/5, Net 30. Calculate the cost of the trade credit if your firm does not take the discount and pays on day 30.

 

Chapter 27 (page 925):

Which of the following companies are likely to have high short-term financing needs? Why?
A clothing retailer
A professional sports team
An electric utility
A company that operates toll roads
A restaurant chain

Sailboats Etc. is a retail company specializing in sailboats and other sailing-related equipment. The following table contains financial forecasts as well as current (month 0) working capital levels. During which months are the firm’s seasonal working capital needs the greatest? When does it have surplus cash?

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FIN 515 Week 6 Quiz

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FIN 515 Week 6 Quiz

Question : You work for Athens Inc. and you must estimate the Year 1 operating cash flow for a project with the following data. What is the Year 1 operating cash flow?

Question : Which of the following is not a cash flow and thus should not be reflected in the analysis of a capital budgeting project?

Question : Which of the following is not a key element in strategic planning as it is described in the text?

Question : Which of the following assumptions is embodied in the AFN formula forecasting method?

Question : How is the capital intensity ratio generally defined?

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FIN 515 Week 6 Project Calculating the Weighted Average Cost of Capital (Nike)

FIN 515 Week 6 Project Calculating the Weighted Average Cost of Capital (Nike)

Once again, your team is the key financial management team for your company. The company’s CEO is now looking to expand its operations by investing in new property, plant, and equipment. In order to effectively evaluate the project’s effectiveness, you have been asked to determine the firm’s weighted average cost of capital. To determine the cost of capital, here is what you have been asked to do.

 

1.      Go to Yahoo Finance (http://finance.yahoo.com) and capture the income statement information for the company you selected. (Be sure that your company has debt on their balance sheet. This will be required in your project.)

a.       Enter your company’s name or ticker symbol. Your company’s information should appear.

b.      Click on the Financials tab, and select the income statement option. Three years’ worth of income statements should appear. Copy and paste this data into a spreadsheet.

c.       Repeat step b. above for the balance sheets of the company.

d.      Click on “Historical Prices.” Capture the closing price of the stock as of the balance sheet date for the three fiscal years used in steps b and c above.

2.      Calculate the Weighted Average Cost of Capital (WACC) for the company:

 

Cost of Debt

                                                              i.      Determine the market value of the firm’s debt issues. Be sure to review the firm’s 10-K. Also, the website http://finra-markets.morningstar.com/BondCenter may be of assistance.

                                                            ii.      You will need to calculate the firm’s composite YTM on its bonds. This can be achieved by calculating a weighted-average YTM for its bond issues.

                                                          iii.      After calculating the YTM for the bond issues, calculate the firm’s after-tax cost of debt. If the firm’s marginal tax rate cannot be identified in its 10-K, assume that the tax rate will be 35%.

 

b.      Cost of Equity

                                                              i.      Calculate the firm’s cost of equity using the capital asset pricing model (CAPM). The formula for the CAPM is ri= rf + βi × (RMkt - rf).

                                                            ii.      Assume the risk-free rate (rf) is the current rate of 10-year U.S. Treasury Bonds.

                                                          iii.      Calculate the market rate (RMkt) by calculating the market return on the Standard & Poor’s 500 for the past 2 calendar years.

                                                          iv.      The beta for the firm can be obtained from Yahoo! Finance.

 

c.       Calculate the WACC

                                                              i.      Determine the market capitalization of the firm’s common equity and preferred equity, if any.

                                                            ii.      Determine the firm’s capital structure based on the market value of the firm’s equity and debt. The market value of the firm’s debt can be obtained from the Morningstar website, listed in the Cost of Debt section above.

                                                          iii.      Calculate the WACC. As you recall, the formula for WACC is rWACC = E ÷ (E + DrE + D ÷ (E + DrD(1 - TC).

Deliverable

Prepare a narrated PowerPoint presentation using VoiceThread or WebEx that shows the steps you performed to calculate the WACC for your firm. Feel free to embed your Excel spreadsheets in the presentation to demonstrate your calculations. Be sure to discuss how the values were obtained or derived to arrive at your WACC result. Finally, be sure to discuss any strengths or limitations in the calculations you performed, and discuss your analysis about the overall validity of your results. Both members of the team must be part of the narration in the presentation. 

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FIN 515 Week 6 Problem Set

FIN 515 Week 6 Problem Set

1. What inherent characteristic of corporations creates the need for a system of checks on manager behavior?

2. What are some examples of agency problems?

3. What are the advantages and disadvantages of the corporate organizational structure?

4. What is the role of the board of directors in corporate governance?

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FIN 515 Week 5 Problem Set

FIN 515 Week 5 Problem Set

Chapter 10 (pages 345–348)

4. You bought a stock one year ago for $50 per share and sold it today for $55 per share. It paid a $1 per share dividend today.
a. What was your realized return?
b. How much of the return came from dividend yield and how much came from capital gain?

20. Consider two local banks. Bank A has 100 loans outstanding, each for $1 million, that it expects will be repaid today. Each loan has a 5% probability of default, in which case the bank is not repaid anything. The chance of default is independent across all the loans. Bank B has only one loan of $100 million outstanding, which it also expects will be repaid today. It also has a 5% probability of not being repaid. Explain the difference between the type of risk each bank faces. Which bank faces less risk? Why?

22. Consider the following two, completely separate, economies. The expected return and volatility of all stocks in both economies is the same. In the first economy, all stocks move together—in good times all prices rise together and in bad times they all fall together. In the second economy, stock returns are independent—one stock increasing in price has no effect on the prices of other stocks. Assuming you are risk-averse and you could choose one of the two economies in which to invest, which one would you choose? Explain.

30. What does the beta of a stock measure?

35. Suppose the market risk premium is 5% and the risk-free interest rate is 4%. Using the data in Table 10.6 (also shown above), calculate the expected return of investing in
a. Starbucks’ stock.
b. Hershey’s stock.
c. Autodesk’s stock.

Chapter 11 (pages 390–396):

2. You own three stocks: 600 shares of Apple Computer, 10,000 shares of Cisco Systems, and 5,000 shares of Colgate-Palmolive. The current share prices and expected returns of Apple, Cisco, and Colgate-Palmolive are, respectively, $500, $20, $100 and 12%, 10%, 8%.
a. What are the portfolio weights of the three stocks in your portfolio?
b. What is the expected return of your portfolio?
c. Suppose the price of Apple stock goes up by $25, Cisco rises by $5, and Colgate-Palmolive falls by $13. What are the new portfolio weights?
d. Assuming the stocks’ expected returns remain the same, what is the expected return of the portfolio at the new prices?

50. Suppose Autodesk stock has a beta of 2.16, whereas Costco stock has a beta of 0.69. If the risk-free interest rate is 4% and the expected return of the market portfolio is 10%, what is the expected return of a portfolio that consists of 60% Autodesk stock and 40% Costco stock, according to the CAPM?

Chapter 12 (page 431):

26. Unida Systems has 40 million shares outstanding trading for $10 per share. In addition, Unida has $100 million in outstanding debt. Suppose Unida’s equity cost of capital is 15%, its debt cost of capital is 8%, and the corporate tax rate is 40%.
a. What is Unida’s unlevered cost of capital?
b. What is Unida’s after-tax debt cost of capital?
c. What is Unida’s weighted average cost of capital?

27. You would like to estimate the weighted average cost of capital for a new airline business. Based on its industry asset beta, you have already estimated an unlevered cost of capital for the firm of 9%. However, the new business will be 25% debt financed, and you anticipate its debt cost of capital will be 6%. If its corporate tax rate is 40%, what is your estimate of its WACC?

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FIN 515 Week 4 Problem Set

FIN 515 Week 4 Problem Set

Bonds-1. Interest on a certain issue of bonds is paid annually with a coupon rate of 8%. The bonds have a par value of $1,000. The yield to maturity is 9%. What is the current market piece of these bonds? The bonds will mature in 5 years.

Bonds-2. A certain bond has 12 years left to maturity. Interest is paid annually at a coupon rate of 10%. The bonds are currently selling for $850. What is their YTM?

Bonds-3.  A certain bond pays a semiannual coupon rate at a 10% annual rate. The bond has a par value of $1,000. There are eight years to maturity. The yield to maturity is 9%. What is the current price of the bond?

Bonds-4. A particular corporate bond has a par value of $1,000. Coupon payments are $40 and are paid twice a year. Seven years are left on the life of the bond.The YTM is 9%. What is the price of the bond?

Bond-5. A given bond has 5 years to maturity. It has a face value of $1,000. It has a YTM of 5% and the coupons are paid semiannually at a 10% annual rate. What does the bond currently sell for?

Bond-6. A given bond has five years left to maturity. Interest is paid annually and the annual coupon rate is 9%. The par value of the bond is $1,000. The bond currently sells for $1,000. What is the yield to maturity?

9-1.Assume Evco, Inc., has a current price of $50 and will pay a $2 dividend in 1 year, and its equity cost of capital is 15%. What price must you expect it to sell for right after paying the dividend in 1 year in order to justify its current price?

9-5.NoGrowth Corporation currently pays a dividend of $2 per year, and it will continue to pay this dividend forever. What is the price per share if its equity cost of capital is 15% per year?

9-6.Summit Systems will pay a dividend of $1.50 this year. If you expect Summit’s dividend to grow by 6% per year, what is its price per share if its equity cost of capital is 11%?

9-7. Dorpac Corporation has a dividend yield of 1.5%. Dorpac’s equity cost of capital is 8%, and its dividends are expected to grow at a constant rate. a. What is the expected growth rate of Dorpac’s dividends? b. What is the expected growth rate of Dorpac’s share price?

9-12.Procter & Gamble will pay an annual dividend of $0.65 1 year from now. Analysts expect this dividend to grow at 12% per year thereafter until the fifth year. After then, growth will level off at 2% per year. According to the dividend-discount model, what is the value of a share of Procter & Gamble stock if the firm’s equity cost of capital is 8%?

 

 

 

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FIN 515 Week 4 Midterm – 3 Sets

 FIN 515 Week 4 Midterm

1. (TCO G) The firm’s asset turnover measures

2. (TCO G) Suppose Novak Company experienced a reduction in its ROE over the last year. This fall could be attributed to

3. (TCO B) You plan on retiring in 20 years. You currently have $275,000 and think you will need $1,000,000 to retire. Assuming you don’t deposit any additional money into the account, what annual return will you need to earn to meet this goal?

4. (TCO B) You take out a 4 year car loan for $18,000. The loan has a 4% annual interest rate. The payments are made monthly. What are the monthly payments? Show your work

5. (TCO B) You currently have $10,000 in your retirement account. If you deposit $500 per month and the account pays 5% interest, how much will be in the account in 10 years? Show your work.

6. (TCO B) You have a two children, A and B. Child A is not going to college but is working in a business to learn the ropes. Child A plans on opening a business someday. Child B is attending college. You put a certain amount of money into an account. From this account, Child B will receive $2,000 per month for the next four years. Whatever is left at that time will go to Child A to help start the business. You want Child A to receive $96,000 at that time. The account pays 7% annually, compounded monthly. How much money do you need to start the account? Show your work.

7. (TCO F) A project requires an initial cash outlay of $95,000 and has expected cash inflows of $20,000 annually for 9 years. The cost of capital is 10%. What is the project’s NPV? Show your work.

8. (TCO F) A project requires an initial cash outlay of $60,000 and has expected cash inflows of $15,000 annually for 8 years. The cost of capital is 10%. What is the project’s payback period? Show your work.

9. (TCO F) A project requires an initial cash outlay of $95,000 and has expected cash inflows of $20,000 annually for 9 years. The cost of capital is 10%. What is the project’s IRR? Show your work.

10. (TCO F) A project requires an initial cash outlay of $40,000 and has expected cash inflows of $12,000 annually for 7 years. The cost of capital is 10%. What is the project’s discounted payback period? Show your work.

11. (TCO F) Company A has the opportunity to do any, none, or all of the projects for which the net cash flows per year are shown below. The projects are not mutually exclusive. The company has a cost of capital of 15%. Which should the company do and why? You must use at least two capital budgeting methods. Show your work. Explain your answer thoroughly.

 

(1 ) (TCO A) Which of the following statements is CORRECT? (Points : 10)

 

(a) It is generally more expensive to form a proprietorship than a corporation because, with a proprietorship, extensive legal documents are required.
(b) Corporations face fewer regulations than sole proprietorships.
(c) One disadvantage of operating a business as a sole proprietorship is that the firm is subject to double taxation, at both the firm level and the owner level.
(d) One advantage of forming a corporation is that equity investors are usually exposed to less liability than in a regular partnership.
(e) If a regular partnership goes bankrupt, each partner is exposed to liabilities only up to the amount of his or her investment in the business.

 

(2) (TCO G) A security analyst obtained the following information from Prestopino Products’ financial statements:

Retained earnings at the end of 2009 were $700,000, but retained earnings at the end of 2010 had declined to $320,000.
• The company does not pay dividends.
• The company’s depreciation expense is its only non-cash expense; it has no amortization charges.
• The company has no non-cash revenues.
• The company’s net cash flow (NCF) for 2010 was $150,000.

 

On the basis of this information, which of the following statements is CORRECT? (Points : 10)
(a) Prestopino had negative net income in 2010.
( b ) Prestopino’s depreciation expense in 2010 was less than $150,000.

 

(c) Prestopino had positive net income in 2010, but its income was less than its 2009 income.

(d) Prestopino’s NCF in 2010 must be higher than its NCF in 2009.

 

(e) Prestopino’s cash on the balance sheet at the end of 2010 must be lower than the cash it had on the balance sheet at the end of 2009.

 

(3) TCO G) Beranek Corp. has $410,000 of assets, and it uses no debt—it is financed only with common equity. The new CFO wants to employ enough debt to bring the debt/assets ratio to 40%, using the proceeds from the borrowing to buy back common stock at its book value. How much must the firm borrow to achieve the target debt ratio? (Points : 10)

 

$155,800

$164,000

$172,200

$180,810

$189,851

 

(4) (TCO B) You deposit $1,000 today in a savings account that pays 3.5% interest, compounded annually. How much will your account be worth at the end of 25 years? (Points : 10)

 

$2,245.08

$2,363.24

$2,481.41

$2,605.48

$2,735.75

 

(5)(TCO B) You sold a car and accepted a note with the following cash flow stream as your payment. What was the effective price you received for the car assuming an interest rate of 6.0%?
Years: 0 1 2 3 4
|———–|————–|————–|————–|
CFs: $0 $1,000 $2,000 $2,000 $2,000 (Points : 10)

 

$5,987

$6,286

$6,600

$6,930

$7,277

 

(6) (TCO B) Suppose you borrowed $12,000 at a rate of 9.0% and must repay it in four equal installments at the end of each of the next four years. How large would your payments be? (Points : 10)

 

3,704.02

$3,889.23

$4,083.69

$4,287.87

$4,502.26

 

(7 ) (TCO D) Which of the following statements is CORRECT? (Points : 10)

 

(a) If a bond is selling at a discount, the yield to call is a better measure of return than the yield to maturity.
(b) On an expected yield basis, the expected capital gains yield will always be positive because an investor would not purchase a bond with an expected capital loss.

(c) On an expected yield basis, the expected current yield will always be positive because an investor would not purchase a bond that is not expected to pay any cash coupon interest.

(d) If a coupon bond is selling at par, its current yield equals its yield to maturity.

(e) The current yield on Bond A exceeds the current yield on Bond B; therefore, Bond A must have

 

(8 ) (TCO D) Ezzell Enterprises’ noncallable bonds currently sell for $1,165. They have a 15-year maturity, an annual coupon of $95, and a par value of $1,000. What is their yield to maturity? (Points : 10)

 

6.20%

6.53%

6.87%

7.24%

7.62%

 

(9 ) (TCO C) Niendorf Corporation’s five-year bonds yield 6.75%, and five-year T-bonds yield 4.80%. The real risk-free rate is r* = 2.75%, the inflation premium for five-year bonds is IP = 1.65%, the default risk premium for Niendorf’s bonds is DRP = 1.20% versus zero for T-bonds, and the maturity risk premium for all bonds is found with the formula MRP = (t – 1) x 0.1%, where t = number of years to maturity. What is the liquidity premium (LP) on Niendorf’s bonds? (Points : 10)

 

0.49%

0.55%

0.61%

0.68%

0.75%

 

(10 ) (TCO C) Assume that investors have recently become more risk averse, so the market risk premium has increased. Also, assume that the risk-free rate and expected inflation have not changed. Which of the following is most likely to occur? (Points : 10)

 

(a) The required rate of return for an average stock will increase by an amount equal to the increase in the market risk premium.

 

(b) The required rate of return will decline for stocks whose betas are less than 1.0.

 

(c) The required rate of return on the market, rM, will not change as a result of these changes.

 

(d) The required rate of return for each individual stock in the market will increase by an amount equal to the increase in the market risk premium.

 

(e) The required rate of return on a riskless bond will decline.

 

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FIN 515 Week 3 Project Financial Statement Analysis (Nike)

FIN 515 Week 3 Project Financial Statement Analysis (Nike)

Continuing with your Week 2 Project, now your CEO after reviewing your earlier Week 2 PowerPoint submission has asked your team to complete an additional benchmark analysis task, before the upcoming Board Meeting. For this part of the project your team needs to do an analysis of the market and operational characteristics of your company and its financial profile. For this project, your team will need to select four companies that are direct competitors of your company. This sample selection should be based on revenue, profitability, market capitalization, market segment and product characteristics.

This project is an additional benchmark data analytics project. The objective of this part of the project will be to do a comparative financial analysis of your company with the averages of the sample of four companies that will form your comparative group.

The project deliverables will be another PowerPoint presentation to the CEO explaining the financial performance of your company compared to the sample of four comparable companies. The analysis should include the following deliverables:

1. An explanation of the logic of the selection of the four comparable group companies. Why were these companies selected?

2.Your team’s data extraction strategy, process and methodology.

3. A financial comparison of your company to the average of the comparator group on the following financial factors.

a. Profitability

b. Debt Management

c. Liquidity

d. Asset Management

e. Value Creation – based on a the 3-year trend in Free

Cash Flow

In order to complete this project, your team has to select which ratios you are going to use in each of the five categories given above. In addition to that, your team will have to briefly explain why you are selecting the ratios you are using in your benchmark study.

Then your team will have to collect the financial data for your company and the financial data of the four competitor companies. The data can be collected from two financial data bases such as, Yahoo Finance, Lexis Nexis, Plunkett, or bizstats.com. Your team will then have to collect and calculate the averages of the four competitor companies. (Please note that no ratio calculations are required for each company, the ratios should be readily available on the websites noted above. You will only need to calculate the average ratios for the four companies combined.)

Your team will proceed to developing a PowerPoint presentation presenting the comparison and your team’s commentary of what your team discerns from the comparison. PowerPoint should not have more than ten slides. Just like the previous project your team should use Webex or Voicethread, and prepare an oral presentation that presents your PowerPoint presentation. Each team member must participate in this presentation

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FIN 515 Week 3 Problem Set

FIN 515 Week 3 Problem Set

Chapter 7 (pages 225–228):

 

1. Your brother wants to borrow $10,000 from you. He has offered to pay you back $12,000 in a year. If the cost of capital of this investment opportunity is 10%, what is its NPV? Should you undertake the investment opportunity? Calculate the IRR and use it to determine the maximum deviation allowable in the cost of capital estimate to leave the decision unchanged.

 

8. You are considering an investment in a clothes distributor. The company needs $100,000 today and expects to repay you $120,000 in a year from now. What is the IRR of this investment opportunity? Given the riskiness of the investment opportunity, your cost of capital is 20%. What does the IRR rule say about whether you should invest?

 

19. You are a real estate agent thinking of placing a sign advertising your services at a local bus stop. The sign will cost $5,000 and will be posted for one year. You expect that it will generate additional revenue of $500 per month. What is the payback period?

 

21. You are deciding between two mutually exclusive investment opportunities. Both require the same initial investment of $10 million. Investment A will generate $2 million per year (starting at the end of the first year) in perpetuity. Investment B will generate $1.5 million at the end of the first year and its revenues will grow at 2% per year for every year after that.

 

  • a. Which investment has the higher IRR?
  • b. Which investment has the higher NPV when the cost of capital is 7%?
  • c. In this case, for what values of the cost of capital does picking the higher IRR give the correct answer as to which investment is the best opportunity?

Chapter 8 (260–262)

 

1. Pisa Pizza, a seller of frozen pizza, is considering introducing a healthier version of its pizza that will be low in cholesterol and contain no trans fats. The firm expects that sales of the new pizza will be $20 million per year. While many of these sales will be to new customers, Pisa Pizza estimates that 40% will come from customers who switch to the new, healthier pizza instead of buying the original version.

 

a. Assume customers will spend the same amount on either version. What level of incremental sales is associated with introducing the new pizza?

 

b. Suppose that 50% of the customers who will switch from Pisa Pizza’s original pizza to its healthier pizza will switch to another brand if Pisa Pizza does not introduce a healthier pizza. What level of incremental sales is associated with introducing the new pizza in this case?

 

6. Cellular Access, Inc. is a cellular telephone service provider that reported net income of $250 million for the most recent fiscal year. The firm had depreciation expenses of $100 million, capital expenditures of $200 million, and no interest expenses. Working capital increased by $10 million. Calculate the free cash flow for Cellular Access for the most recent fiscal year.

 

12. A bicycle manufacturer currently produces 300,000 units a year and expects output levels to remain steady in the future. It buys chains from an outside supplier at a price of $2 a chain. The plant manager believes that it would be cheaper to make these chains rather than buy them. Direct in-house production costs are estimated to be only $1.50 per chain. The necessary machinery would cost $250,000 and would be obsolete after 10 years. This investment could be depreciated to zero for tax purposes using a 10-year straight-line depreciation schedule. The plant manager estimates that the operation would require $50,000 of inventory and other working capital upfront (year 0), but argues that this sum can be ignored because it is recoverable at the end of the 10 years. Expected proceeds from scrapping the machinery after 10 years are $20,000.

 

If the company pays tax at a rate of 35% and the opportunity cost of capital is 15%, what is the net present value of the decision to produce the chains in-house instead of purchasing them from the supplier?

 

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