1 , Your company, RMU Inc., is considering a new project whose data are shown below. What is the projects Year 1 cash flow? Sales revenues $22,250 Depreciation $8,000 Other operating costs $12,000 Tax rate 35.0% 2 Mushali Services is now at the end of the final year of a project. The equipment originally cost $22,500, of which 75% has been depreciated. The firm can sell the used equipment today for $6,000, and its tax rate is 40%. What is the equipments after-tax salvage value for use in a capital budgeting analysis? Note that if the equipments final market value is less than its book value, the firm will receive a tax credit as a result of the sale. 3 McCall Manufacturing has a WACC of 10%. The firm is considering two normal, equally risky, mutually exclusive, but not repeatable projects. The two projects have the same investment costs, but Project A has an IRR of 15%, while Project B has an IRR of 20%. Assuming the projects’ NPV profiles cross in the upper right quadrant, which of the following statements is CORRECT? a. Each project must have a negative NPV. b. Since the projects are mutually exclusive, the firm should always select Project B. c. If the crossover rate is 8%, Project B will have the higher NPV. d. Only one project has a positive NPV. e. If the crossover rate is 8%, Project A will have the higher NPV. a. Each project must have a negative NPV b. Since the projects are mutually exclusive, the firm should always select Project B c. If the crossover rate is 8%, Project B will have the higher NPV d. Only one project has a positive NPV e. If the crossover rate is 8%, Project A will have the higher NPV 4 If a stocks dividend is expected to grow at a constant rate of 5% a year, which of the following statements is CORRECT? The stock is in equilibrium. a. The expected return on the stock is 5% a year. b. The stocks dividend yield is 5%. c. The price of the stock is expected to decline in the future. d. The stocks required return must be equal to or less than 5%. e. The stocks price one year from now is expected to be 5% above the current price. a. The expected return on the stock is 5% a year b. The stocks dividend yield is 5% c. The price of the stock is expected to decline in the future d. The stocks required return must be equal to or less than 5% e. The stocks price one year from now is expected to be 5% above the current price 5 Schnusenberg Corporation just paid a dividend of D0 = $0.75 per share, and that dividend is expected to grow at a constant rate of 6.50% per year in the future. The company’s beta is 1.25, the required return on the market is 10.50%, and the risk-free rate is 4.50%. What is the company’s current stock price? 6 Desai Industries is analyzing an average-risk project, and the following data have been developed. Unit sales will be constant, but the sales price should increase with inflation. Fixed costs will also be constant, but variable costs should rise with inflation. The project should last for 3 years, it will be depreciated on a straight-line basis, and there will be no salvage value. This is just one of many projects for the firm, so any losses can be used to offset gains on other firm projects. What is the projects expected NPV? WACC 10.0% Net investment cost (depreciable basis) $200,000 Units sold 50,000 Average price per unit, Year 1 $25.00 Fixed op. cost excl. deprec. (constant) $150,000 Variable op. cost/unit, Year 1 $20.20 Annual depreciation rate 33.333% Expected inflation ra…
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