FIN 571 Week 6 Problems

Briarcrest Condiments is a spice-making firm. Recently, it developed a new process for producing spices. The process requires new machinery that would cost $1,892,468. have a life of five years, and would produce the cash flows shown in the following table.

Year Cash Flow
1 $479,286
2 -246,956
3 670,789
4 781,734
5 538,544

What is the NPV if the discount rate is 16.59 percent?(Enter negative amounts using negative sign e.g. -45.25. Round answer to 2 decimal places, e.g. 15.25.)

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 $12.10 million. This
investment will consist of $2.10 million for land and $10.00 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 $5.25 million, $2.25 million above book value. The
farm is expected to produce revenue of $2.02 million each year, and annual cash flow
from operations equals $1.87 million. The marginal tax rate is 35 percent, and the
appropriate discount rate is 9 percent. Calculate the NPV of this investment.
Solution: Computation of the NPV of investment

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 Mountain%u2019s opportunity cost of capital is 16.4 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 4,400 7,000
2 3,800 7,000
3 3,200 7,000
4 2,600 7,000
5 2,000 7,000

Calculate the NPV of each choice.(Round answers to the nearest whole dollar, e.g. 5,275.)

1.1. Chip’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 93 percent as high if the price is raised 10 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.)

2.2. Capital Co. has a capital structure, based on current market values, that consists of 26 percent debt, 19 percent preferred stock, and 55 percent common stock. If the returns required by investors are 11 percent, 12 percent, and 14 percent for the debt, preferred stock, and common stock, respectively, what is Capital’s after-tax 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%.)