Finance Math Problems
Briarcrest Condiments is a spicemaking firm. Recently, it developed a new process for producing spices. The
process requires new machinery that would cost $2,177,106. 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 13.32 percent? (Enter negative amounts using negative sign e.g. 45.25.
Round answer to 2 decimal places, e.g. 15.25.)
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 $2.90 million for land and $8.90 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 $5.00 million, $2.28 million above book value. The farm is expected to produce revenue of $2.02
million each year, and annual cash flow from operations equals $1.85 million. The marginal tax rate is 35 percent, and
the appropriate discount rate is 9 percent. Calculate the NPV of this investment. (Round intermediate calculations
and final answer to 2 decimal places, e.g. 15.25.)
Bell Mountain Vineyards is considering updating its current manual accounting system with a highend 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 17.8 percent, and the costs and values of investments made
at different times in the future are as follows:
Value of Future Savings
(at time of purchase)
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?
Chip’s Home Brew Whiskey management forecasts that if the firm sells each bottle of SnakeBite 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
12 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 $ .
Capital Co. has a capital structure, based on current market values, that consists of 48 percent debt, 16 percent
preferred stock, and 36 percent common stock. If the returns required by investors are 12 percent, 12 percent, and 18
percent for the debt, preferred stock, and common stock, respectively, what is Capital’s aftertax WACC? Assume
that the firm’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
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