1. Net Present Value: Johnson Complex Fabrications is a metal parts manufacturing company. It has developed a new process for producing extruded aluminum tubing. The process requires $1,968,450 initial investment. It expected to have a life of five years and would produce net cash inflows for each of the next five years: year 1 $512,496; year 2 $242,637; year 3 $814,558; year 4 $887,225 and year 5 $712,642.
What is the Net Present Value (NPV) if the discount rate is 15.9 percent? (10 points)”
2. Free Cash Flow (FCF) and NPV for a project. Daniels Agricultural Products is considering buying a new farm that it plans to operate for ten years. The farm will require an initial investment of 12 million dollars. The investment will consist of 2 million dollars for land and 10 million dollars for trucks and other equipment. The land, all trucks and all other equipment is expected to be sold at the end of ten years for a price of five million dollars, which is two million dollars above book value. The farm is expected to produce revenue of 2 million dollars each year and annual cash flow from operations is projected to be 1.8 million dollars. The marginal tax rate is 35 percent and the company’s required return or discount rate is 10 percent. Calculate the NPV of this investment. (10 points)
3. Replace an existing asset: Davis Plumbing 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 initial purchase cost of the system continues to decline. The company’s opportunity cost of capital or discount rate is 10 percent. The initial investment costs and annual savings made at different times in the future are shown below: (10 points)
When should Davis replace the system to have the highest present value of the NPV? (10 points)
4. Scenario analysis: Park City Boutique Brewery management forecasts that if the firm sells each case of Special Homebrewed for 20 dollars then the demand for the product will be 15,000 cases per year. If they raised the price per case ten percent then they expect demand to fall to 90 percent of the expected sales at the current price of 20 dollars per case. The firm’s variable cost per case is ten dollars and the total fixed cash costs for the year are 100,000 dollars. Depreciation and amortization charges are 20,000 dollars and the firm has a 30 percent marginal tax rate. Management anticipates it will need to increase working capital by 3,000 dollars for the year, regardless of the pricing of the product. What will be the effect of the price increase on the firm’s free cash flow for the year? (10 points)
5. WACC for a firm: Acme 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 for the debt, 10 percent for the preferred stock and 15 percent for the common stock, what is Acme’s after tax weighted average cost of capital. Assume that the firm’s marginal tax rate is 40 percent. (10 points)