# Fin 571

1.  Briarcrest Condiments is a spice-making firm. Recently, it developed a new process for producing spices. The process requires new machinery that would cost \$2,442,650. have a life of five years, and would produce the cash flows shown in the following table.

 Year Cash Flow 1 \$631,805 2 -284,880 3 1,011,681 4 1,001,588 5 685,490

What is the NPV if the discount rate is 13.30 percent?
(Enter negative amounts using negative sign e.g. -45.25. Round answer to 2 decimal places, e.g. 15.25.)

 NPV is

2.  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 \$11.80 million. This investment will consist of \$2.80 million for land and \$9.00 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 \$5.22 million, \$2.44 million above book value. The farm is expected to produce revenue of \$2.06 million each year, and annual cash flow from operations equals \$1.88 million. The marginal tax rate is 35 percent, and the appropriate discount rate is 10 percent. Calculate the NPV of this investment. (Round intermediate calculations and final answer to 2 decimal places, e.g. 15.25.)

 NPV

The project should be  (Accepted or Rejected?)

3.  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 Mountainâ€™s opportunity cost of capital is 12.9 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 4,700 7,000 2 4,400 7,000 3 4,100 7,000 4 3,800 7,000 5 3,500 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 (year 1, 2, 3, 4, 5?)

4.  Chipâ€™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 84 percent as high if the price is raised 9 percent. Chipâ€™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 firmâ€™s FCF for the year? (Round answers to nearest whole dollar, e.g. 5,275.)

 At \$20 per bottle the Chipâ€™s FCF is \$

and at the new price Chipâ€™s FCF is \$

5.  Capital Co. has a capital structure, based on current market values, that consists of 30 percent debt, 9 percent preferred stock, and 61 percent common stock. If the returns required by investors are 8 percent, 10 percent, and 16 percent for the debt, preferred stock, and common stock, respectively, what is Capitalâ€™s after-tax WACC? Assume that the firmâ€™s marginal tax rate is 40 percent. (Round intermediate calculations to 4 decimal places, e.g. 1.2514 and final answer to 2 decimal places, e.g. 15.25%.)

 After tax WACC =