2024 – 1 10 14 Net present value a Briarcrest Condiments is a spice making firm Recently it developed a new

 

1. 10.14 Net present value:

 

a. Briarcrest Condiments is a spice-making firm.  Recently, it developed a new process for producing spices. The process requires $1,968,450 have a life of five years, and would produce the cash-flows shown in the following table.

 

 

 

What is the NPV if the discount rate is 15.9 percent?

 

 

 

Year                            Cash Flow

 

1                                  $512,496

 

2                                   -242,637

 

3                                     814,558

 

4                                     887,225

 

5                                     712,642

 

 

 

b. Briarcrest Condiments is a spice-making firm. Recently, it developed a new process for producing spices. The process requires new machinery that would cost $2,030,062. have a life of five years, and would produce the cash flows shown in the following table.

 

Year    Cash Flow

 

1          $489,690

 

2          -280,003

 

3          641,383

 

4          997,152

 

5          692,973

 

 

 

What is the NPV if the discount rate is 15.28 percent?

 

           

 

2. 11.20 FCF and NPV for a project:

 

a.  Archer Daniels Midland Company is considering buying a new farm that it plans to for 10 years. The farm will require an initial investment of $12 million. This investment will consist of $2 million for land and $10 million for trucks and other equipment. The land, all trucks, and all other equipment is expected to be sold at the end of 10 years for a price of $5 million, $2 million above book value. The farm is expected to produce revenue of $2 million each year, and annual cash flow from operations equals $1.8 million. The marginal tax rate is 35 percent, and the appropriate discount rate is 10 percent.

 

 

 

Calculate the NPV of this investment.

 

 

 

Should project be accepted or rejected?

 

 

 

b. Archer Daniels Midland Company is considering buying a new farm that it plans to operate for 10 years. The farm will require an initial investment of $12.00 million. This investment will consist of $2.90 million for land and $9.10 million for trucks and other equipment. The land, all trucks, and all other equipment is expected to be sold at the end of 10 years at a price of $5.19 million, $2.07 million above book value. The farm is expected to produce revenue of $2.09 million each year, and annual cash flow from operations equals $1.93 million. The marginal tax rate is 35 percent, and the appropriate discount rate is 10 percent. Calculate the NPV of this investment.

 

 

 

Calculate the NPV of this investment.

 

 

 

Should project be accepted or rejected?

 

 

 

 

 

3. 11.24 Replace an existing asset:

 

a. Bell Mountain Vineyards is considering updating its current manual accounting system with a high-end electronic system. While the new accounting system would save the company money, the cost of the system continues to decline. The Bell Mountain’s opportunity cost of capital is 10 percent, and the costs and values of investments made at different times in the future are as follows:

 

 

 

Year                            Cost                Value of Future Savings (at time of purchase)

 

0                                  $5,000                                                 $7,000

 

1                                    4,500                                                   7,000

 

2                                    4,000                                                   7,000

 

3                                    3,600                                                   7,000

 

4                                    3,300                                                   7,000

 

5                                    3,100                                                   7,000

 

 

 

What year should Bell Mountain buy the new accounting system?

 

 

 

b. Bell Mountain Vineyards is considering updating its current manual accounting system with a high-end electronic system. While the new accounting system would save the company money, the cost of the system continues to decline. The Bell Mountain’s opportunity cost of capital is 17.5 percent, and the costs and values of investments made at different times in the future are as follows:

 

 

 

Year                            Cost                Value of Future Savings (at time of purchase)

 

0                                  $5,000                                     $7,000

 

1                                    4,250                                       7,000

 

2                                    3,500                                       7,000

 

3                                    2,750                                       7,000

 

4                                    2,000                                       7,000

 

5                                    1,250                                       7,000

 

 

 

Calculate the NPV of each choice. (Round answers to the nearest whole dollar, e.g. 5,275.)

 

 

 

The NPV of each choice is:

 

 

 

NPV0 = $

 

 

 

NPV1 = $

 

 

 

NPV2 = $

 

 

 

NPV3 = $

 

 

 

NPV4 = $

 

 

 

NPV5 = $

 

Suggest when should Bell Mountain buy the new accounting system?

 

 

 

Bell Mountain should purchase the system in

 

 

 

4. 12.24 Scenario analysis:

 

a. Chip’s Home Brew Whiskey management forecasts that if the firm sells each bottle of Snake-Bite for $20, then the demand for the product will be 15,000 bottles per year, whereas sales will be 90 percent as high if the price is raised 10 percent. Chip’s variable cost per bottle is $10, and the total fixed cash cost for the year is $100,000. Depreciation and amortization charges are $20,000, and the firm has a 30 percent marginal tax rate. Management anticipates an increased working capital need of $3,000 for the year.

 

 

 

What will be the effect of the price increase on the firm’s FCF for the year?

 

 

 

b. Chip’s Home Brew Whiskey management forecasts that if the firm sells each bottle of Snake-Bite for $20, then the demand for the product will be 15,000 bottles per year, whereas sales will be 85 percent as high if the price is raised 13 percent. Chip’s variable cost per bottle is $10, and the total fixed cash cost for the year is $100,000. Depreciation and amortization charges are $20,000, and the firm has a 30 percent marginal tax rate. Management anticipates an increased working capital need of $3,000 for the year. What will be the effect of the price increase on the firm’s FCF for the year? (Round answers to nearest whole dollar, e.g. 5,275.)

 

 

 

At $20 per bottle the Chip’s FCF is $ and at the new price Chip’s FCF is $.

 

 

 

 

 

5. 13.11 WACC for a firm:

 

a. Capital Co. has a capital structure, based on current market values, that consists of 50 percent debt, 10 percent preferred stock, and 40 percent common stock.  

 

 

 

If the returns required by investors are 8 percent, 10 percent, and 15 percent for the debt, preferred stock, and common stock, respectively, what is Capital’s after-tax WACC?

 

 

 

Assume that the firm’s marginal tax rate is 40 percent.

 

 

 

b Capital Co. has a capital structure, based on current market values, that consists of 39 percent debt, 15 percent preferred stock, and 46 percent common stock. If the returns required by investors are 8 percent, 10 percent, and 17 percent for the debt, preferred stock, and common stock, respectively, what is Capital’s after-tax WACC? Assume that the firm’s marginal tax rate is 40 percent.

 

 

 

After tax WAC= %.