Problem Assignment TwoPlease provide the solutions in the spaces provided. You may adjust the space if necessary but the question must remain with the answer below it.

7-5: Michaels Bakery is evaluating a new electronic oven. The oven requires an initial cash outlay of $19,000 and will generate after-tax cash inflows of $4,000 per year for eight years. For each of the costs of capital listed below, calculate the NPV, indicate whether to accept or reject the oven, and explain your decision. a. The cost of capital is 10%.

b. The cost of capital is 12%.

c. The cost of capital is 14%.

7-21: Reynolds Enterprises is attempting to evaluate the feasibility of investing $85,000, CF(0), in a machine with a 5-year life. The firm has estimated the cash inflows associated with the proposal as shown below. The firm has a 12% cost of capital.

End of Year (t) Cash Inflows (CFt) 1 $18,000 2 $22,500 3 $27,000 4 $31,500 5 $36,000

a. Calculate the payback period for the proposed investment.

b. Calculate the NPV for the proposed investment.

c. Calculate the IRR for the proposed investment.

d. Evaluate the acceptability of the proposed investment using NPV and IRR. What recommendation would you make relative to implementation of the project? Why?

8-10: Wilbur Corporation is considering replacing a machine. The replacement will cut operating costs by $24,000 per year for each of the five years the new machine is expected to last. Although the old machine has a zero book value, it has a remaining useful life of five years. The depreciable value of the new machine is $72,000. Wilbur will depreciate the machine under MACRS using a five-year recovery period and is subject to a 40% tax rate on ordinary income. Estimate the incremental operating cash flows attributable to the replacement. Make sure to consider the depreciation in year six.

8-11: Advanced Electronics Corporation is considering purchasing a new packaging machine to replace a fully depreciated machine that will last five more years. The new machine is expected to have a five-year life and depreciable charges of $4,000 in year 1, $6,400 in year 2, $3,800 in year 3, $2,400 in year 4, $2,400 in year 5, and $1,000 in year 6. The firms estimates of revenues and expenses (excluding depreciation) for the new and old packaging machines are shown below. Advanced Electronics is subject to a 40% tax rate on ordinary income.

New Packaging Machine Old Packaging Machine Year Revenue Expenses Revenue Expenses 1 $50,000 $40,000 $45,000 $35,000 2 $51,000 $40,000 $45,000 $35,000 3 $52,000 $40,000 $45,000 $35,000 4 $53,000 $40,000 $45,000 $35,0005 $54,000 $40,000 $45,000 $35,000

a. Calculate the operating cash flows associated with each packaging machine. Be sure to consider the depreciation in year 6.

b. Calculate the incremental operating cash flows resulting from the proposed packaging machine replacement.

c. Use a time line to depict the incremental cash flows found in part b (above).

8-21: A project generates the following sequence of cash flows over six years:

Year Cash Flow ($ millions) 0 -59.00 1 4.00 2 5.00 3 6.00 4 7.33 5 8.00 6 8.25

a. Calculate the NPV over the six years. The discount rate is 11%.

b. This project does not end after the sixth year but instead will generate cash flows far into the future. Estimate the projects terminal value, assuming that cash flows after year 6 will continue at $8.25 million per year in perpetuity, and then recalculate the investments NPV.

c. Calculate the terminal value assuming that cash flows after the sixth year grow at 2% annually in perpetuity, and then recalculate the NPV.

d. Using market multiples calculate the terminal value by estimating the projects market value at the end of year 6. Specifically, calculate the terminal value while assuming that, at the end of year 6, the projects market value will be ten times greater than its most recent annual cash flow. Recalculate the NPV.

9-11: A firm has an asset base with a market value of $5.3 million. Its debt is worth $2.5 million. If $0.2 million is paid in interest annually and the shareholders expect a 16% annual return, what is the weighted average cost of capital assuming no corporate taxes? What is the WACC if corporate taxes are 45%?

9-19: The asset beta for a particular industry is 0.75. Use the following equation to estimate the equity betas for the following three firms based on their respective debt ratios and tax rates. Then calculate each firms cost of equity assuming an expected market premium of 6% and a risk-free rate of 4%.Equation: Be = Ba [ 1 + (1 Tc) D / E]

Firm A: 75% debt ratio and 35% tax rate

Firm B: 20% debt ratio and 38% tax rate

Firm C: 80% debt ratio and 45% tax rate