Question 1:

a) A company expects a series of 24 monthly receipts of $3,600 each. The first payment will be received 1 month from today. Determine the present value of this series assuming an interest rate of 12% per year compounded semiannually.

b) A company is considering starting a new product line. The new product line requires the installation of new machines and equipment. For this purpose, company wants to borrow money by issuing bonds of $10,000 for 12-year period. The interest on these bonds is to be paid at a rate of 10% per year. Compute the amount of interest to be paid to bondholders over 12-year period: 

                         a) if the simple interest is charged. b) If the interest is compounded annually.

 

c) ANB ltd has common equity of $35.5mn and $31.9mn of long-term debt and $10.3mn of preferred equity on its books. Required return on these funds are 12%, 8%, and 10%, respectively. Market values of the common equity and long-term debt are $46.6mn and $35mn, respectively. Market value of preferred equity is the same as its book value. Estimate WACC for the company given that its effective tax rate is 30%.

 

Question 2:

 ABC Company has two projects:

A: It is considering to purchase an equipment to be attached with the main manufacturing machine. The equipment will cost $6,000 and will have annual cash inflow by $2,200. The life of the equipment is 6 years. After 6 years, it will have no salvage value. The management wants a 20% return on all investments.

 

 B: It is planning to reduce its labor costs by automating a critical task that is currently performed manually. The cost to purchase a new machine is $15,000. The installation of machine can reduce annual labor cost by $4,200. The life of the machine is 15 years. The salvage value of the machine after fifteen years will be zero. The required rate of return of Smart Manufacturing Company is 25%.

 

a)       Will you go ahead with this project A? Explain.

b)       Will you go ahead with this project B? Explain.

c)       What about if these two projects are two mutually exclusive ones?

d)       Will IRR and NPV always give you the same results?

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