1. Consider the following cash flows of two mutually exclusive projects for Spartan Rubber Company. Assume the discount rate for Spartan Rubber Company is 11 percent.
 
Year Dry Prepreg Solvent Prepreg
0 –$ 1,790,000   –$ 795,000 
1   1,109,000     420,000 
2   918,000     690,000 
3   759,000     408,000 
________________________________________
 
a. What is the payback period for each project? (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).)
   
  Payback period
  Dry Prepreg   years 

  Solvent Prepreg  years 

________________________________________
       
 
b. What is the NPV for each project? (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).)
   
  NPV
  Dry Prepreg $  

  Solvent Prepreg $  

________________________________________
     
c. What is the IRR for each project? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places (e.g., 32.16).)
    
  IRR
  Dry Prepreg  % 

  Solvent Prepreg  % 

________________________________________
     
d. Calculate the incremental IRR for the cash flows. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places (e.g., 32.16).)
 
  Incremental IRR  %

2. Mario Brothers, a game manufacturer, has a new idea for an adventure game. It can market the game as a traditional board game or as an interactive CD-ROM, but not both. Consider the following cash flows of the two mutually exclusive projects for Mario Brothers. Assume the discount rate for Mario Brothers is 8 percent.
 
Year Board Game CD-ROM
0 –$ 1,750    –$ 3,800 
1   800     2,300 
2   1,500     1,680 
3   320     1,350 
________________________________________
 
a. What is the payback period for each project? (Do not round intermediate calculations and round your final answers to 2 decimal places (e.g., 32.16).)
 
  Payback period
  Board game  years 

  CD-ROM  years 

________________________________________
   
b. What is the NPV for each project? (Do not round intermediate calculations and round your final answers to 2 decimal places (e.g., 32.16).)
 
    NPV
  Board game $  

  CD-ROM $  

________________________________________
 
c. What is the IRR for each project? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places (e.g., 32.16).)
 
  IRR
  Board game  % 

  CD-ROM  % 

________________________________________
   
d. What is the incremental IRR? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places (e.g., 32.16).)
 
  Incremental IRR  % 

3.
Suppose you are offered a project with the following payments:
 
Year Cash Flows  
0 $ 8,700        
1 −4,700        
2 −3,400        
3 −2,500        
4 −1,000        
________________________________________
 
a. What is the IRR of this offer? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places (e.g., 32.16).)
 
 
  IRR  % 

 
b. If the appropriate discount rate is 11 percent, should you accept this offer?
  
  
Reject
 
Accept

 
 
c. If the appropriate discount rate is 24 percent, should you accept this offer?
  
  
Accept
 
Reject

 
 
d-1. What is the NPV of the offer if the appropriate discount rate is 11 percent? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places (e.g., 32.16).)
 
 
  NPV $  

 
 
d-2. What is the NPV of the offer if the appropriate discount rate is 24 percent? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places (e.g., 32.16).)
 
  NPV $  

4.
Sanborn Corp. is comparing two different capital structures. Plan I would result in 9,000 shares of stock and $80,000 in debt. Plan II would result in 7,500 shares of stock and $120,000 in debt. The interest rate on the debt is 8 percent.
 
 
a. Ignoring taxes, compare both of these plans to an all-equity plan assuming that EBIT will be $50,000. The all-equity plan would result in 12,000 shares of stock outstanding. What is the EPS for each of these plans? (Do not round intermediate calculations and round your final answers to 2 decimal places (e.g., 32.16).)
 
 
  EPS
  Plan I $  

  Plan II $  

  All equity $  

________________________________________
   
 
b. In part (a), what are the break-even levels of EBIT for each plan as compared to that for an all-equity plan? (Do not round intermediate calculations.)
 
 
  EBIT
  Plan I and all-equity $  

  Plan II and all-equity $  

________________________________________
 
 
c. Ignoring taxes, at what level of EBIT will EPS be identical for Plans I and II? (Do not round intermediate calculations.)
 
  EBIT $  

 
d-1 Assuming that the corporate tax rate is 40 percent, what is the EPS of the firm? (Do not round intermediate calculations and round your final answers to 2 decimal places (e.g., 32.16).)

 
  EPS
  Plan I $  

  Plan II $  

  All equity $  

________________________________________
 
d-2 Assuming that the corporate tax rate is 40 percent, what are the break-even levels of EBIT for each plan as compared to that for an all-equity plan? (Do not round intermediate calculations.)
 
  EBIT
  Plan I and all-equity $  

  Plan II and all-equity $  

________________________________________
 
d-3 Assuming that the corporate tax rate is 40 percent, at what level of EBIT will EPS be identical for Plans I and II? (Do not round intermediate calculations.)
 
 
  EBIT $  

5.
Acetate, Inc., has equity with a market value of $22.6 million and debt with a market value of $11.3 million. The cost of debt is 8 percent per year. Treasury bills that mature in one year yield 4 percent per year, and the expected return on the market portfolio is 10 percent. The beta of Acetate’s equity is 1.11. The firm pays no taxes.
 
a. What is Acetate’s debt-equity ratio? (Do not round intermediate calculations and round your final answer to 2 decimal places (e.g., 32.16).)
 
  Debt–equity ratio  

 
 
b. What is the firm’s weighted average cost of capital? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places (e.g., 32.16).)
 
  Weighted average cost of capital  % 

 
 
c. What is the cost of capital for an otherwise identical all-equity firm? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places (e.g., 32.16).)
 
  Cost of capital  % 

6. 
Cavo Corp. has 7 percent coupon bonds making annual payments with a YTM of 6.5 percent. The current yield on these bonds is 6.85 percent.

How many years do these bonds have left until they mature? (Do not round intermediate calculations and round your final answer to 2 decimal places (e.g., 32.16).)

  Maturity of bond  years 

7. 
We are evaluating a project that costs $832,000, has an eight-year life, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at 40,000 units per year. Price per unit is $40, variable cost per unit is $15, and fixed costs are $700,000 per year. The tax rate is 35 percent, and we require a return of 18 percent on this project.
  
a. Calculate the accounting break-even point. (Do not round intermediate calculations and round your final answer to nearest whole number (e.g., 32).)
 
 
  Break-even point  units 

    
b-1 Calculate the base-case cash flow and NPV. (Do not round intermediate calculations and round your NPV answer to 2 decimal places (e.g., 32.16).)
 
 
  
  Cash flow   $  

  NPV $  

________________________________________
 
 
b-2 What is the sensitivity of NPV to changes in the sales figure? (Do not round intermediate calculations and round your final answer to 3 decimal places (e.g., 32.161).)
 
 
  ΔNPV/ΔQ $  

 
 
b-3 Calculate the change in NPV if sales were to drop by 500 units. (Enter your answer as a positive number. Do not round intermediate calculations and round your answer to 2 decimal places (e.g., 32.16).)

 
    NPV would by $ 

 
c. What is the sensitivity of OCF to changes in the variable cost figure? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your final answer to nearest whole number (e.g., 32).)
 
  ΔOCF/ΔVC $  

8. 
Applied Nanotech is thinking about introducing a new surface cleaning machine. The marketing department has come up with the estimate that Applied Nanotech can sell 16 units per year at $304,000 net cash flow per unit for the next four years. The engineering department has come up with the estimate that developing the machine will take a $14.8 million initial investment. The finance department has estimated that a discount rate of 12 percent should be used.

 
a. What is the base-case NPV? (Enter your answer in dollars, not millions of dollars (e.g. 1,234,567). Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your final answer to 2 decimal places (e.g., 32.16).)

 
  Base-case NPV $  

 
 
b. If unsuccessful, after the first year the project can be dismantled and will have an aftertax salvage value of $10.9 million. Also, after the first year, expected cash flows will be revised up to 21 units per year or to 0 units, with equal probability. What is the revised NPV? (Enter your answer in dollars, not millions of dollars (e.g. 1,234,567). Do not round intermediate calculations and round your final answer to 2 decimal places (e.g., 32.16).)

 
  Revised NPV $