Karsted Air Services is now in the final year of a project. The equipment originally cost $29 million, of which 75% has been depreciated. Karsted can sell the used equipment today for$8 million, and its tax rate is 35%. What is the equipment’s after-tax salvage value?

The Oviedo Company is considering the purchase of a new machine to replace an obsolete one. The machine being used for the operation has a book value and a market value of zero. However, the machine is in good working order and will last at least another 10 years. The proposed replacement machine will perform the operation so much more efficiently that Oviedo’s engineers estimate that it will produce after-tax cash flows (labor savings and depreciation) of $8,000 per year. The new machine will cost$45,000 delivered and installed, and its economic life is estimated to be 10 years. It has zero salvage value. The firm’s WACC is 10%, and its marginal tax rate is 35%. Should Oviedo buy the new machine?

Huang Industries is considering a proposed project whose estimated NPV is $12 million. This estimate assumes that economic conditions will be “average.” However, the CFO realizes that conditions could be better or worse, so she performed a scenario analysis and obtained these results:$

$$\begin{matrix} \text{Economic Scenario} & \text{Probability of Outcome} & \text{NPV}\\ \text{Recession} & \text{0.05} & \text{(\$ 70 million)}\\ \text{Below average} & \text{0.20} & \text{(25 million)}\\ \text{Average} & \text{0.50} & \text{12 million}\\ \text{Above average} & \text{0.20} & \text{20 million}\\ \text{Boom} & \text{0.05} & \text{30 million}\\ \end{matrix}$$

$ Calculate the project’s expected NPV, standard deviation, and coefficient of variation.

Charlene is evaluating a capital budgeting project that should last for 4 years. The project requires 800,000 dollars of equipment. She is unsure what depreciation method to use in her analysis, straight-line or the 3-year MACRS accelerated method. Under straight-line depreciation, the cost of the equipment would be depreciated evenly over its 4-year life (ignore the half-year convention for the straight-line method). The applicable MACRS depreciation rates are 33 percent, 45 percent, 15 percent, and 7 percent. The company's WACC is 8 percent, and its tax rate is 35 percent.

a. What would the depreciation expense be each year under each method?

b. Which depreciation method would produce the higher NPV, and how much higher would it be?

Project L costs $65,000, its expected cash inflows are$12,000 per year for 9 years, and its WACC is 9%. What is the project’s NPV?

The Chang Company is considering the purchase of a new machine to replace an obsolete one. The machine being used for the operation has a book value and a market value of zero. However, the machine is in good working order and will last at least another $10$ years. The proposed replacement machine will perform the operation so much more efficiently that Chang's engineers estimate that it will produce after-tax cash flows (labor savings and depreciation) of $\$ 9,000$ per year. The new machine will cost $\$ 40,000$ delivered and installed, and its economic life is estimated to be $10$ years. It has zero salvage value. The firm's WACC is $10 \%$, and its marginal tax rate is $35 \%$. Should Chang buy the new machine?

Emergency Medical’s stock trades at $145 a share. The company is contemplating a 3-for-2 stock split. Assuming that the stock split will have no effect on the market value of its equity, what will be the company’s stock price following the stock split?

Terrell Trucking Company is in the process of setting its target capital structure. The CFO believes that the optimal debt-to-capital ratio is somewhere between 20% and 50%, and her staff has compiled the following projections for EPS and the stock price at various debt levels: $$ \begin{matrix} \text{Debt/Capital Ratio} & \text{Projected EPS} & \text{Projected Stock Price}\\ \text{20\\%} & \text{\$ 3.10} & \text{\$ 34.25}\\ \text{30} & \text{3.55} & \text{36.00}\\ \text{40} & \text{3.70} & \text{35.50}\\ \text{50} & \text{3.55} & \text{34.00}\\ \end{matrix} $$ Assuming that the firm uses only debt and common equity, what is Terrell’s optimal capital structure? At what debt-to-capital ratio is the company’s WACC minimized?

You must evaluate the purchase of a proposed spectrometer for the R&D department. The base price is $\$ 140,000$, and it would cost another $\$ 30,000$ to modify the equipment for special use by the firm. The equipment falls into the MACRS $3$ -year class and would be sold after $3$ years for $\$ 60,000$. The applicable depreciation rates are $33 \%, 45 \%, 15 \%$, and $7 \%$, as discussed in Appendix 12 A. The equipment would require an $\$ 8,000$ increase in net operating working capital (spare parts inventory). The project would have no effect on revenues, but it should save the firm $\$ 50,000$ per year in before-tax labor costs. The firm's marginal federal-plus-state tax rate is $40 \%$.

a. What is the initial investment outlay for the spectrometer, that is, what is the Year $0$ project cash flow?

b. What are the project's annual cash flows in Years $1$, $2$, and $3$ ?

c. If the WACC is $12 \%$, should the spectrometer be purchased? Explain.

Suppose that IQs of East State University's students can be described by a Normal model with mean 130 and standard deviation 8 points. Also suppose that IQs of students from West State University can be described by a Normal model with mean 120 and standard deviation 10. We select 3 West State students at random. Find the probability that this group's average IQ is at least 125 points.

When there are a total of four projects involved in a capital budgeting study, the maximum number of bundles that can be formulated is: (a) 6 (b) 8 (c) 15 (d) 16

Kaplan and Norton developed a model that can be used to measure and quantify the impact of diversity at different levels and functions of the business. This model is called:

a. The Kaplan model

b. The Norkap method

c. The Balanced Scorecard

d. The systemic model

Identify the conjunctions in the following sentences, and tell whether each is a coordinating conjunction, a correlative conjunction, or a subordinating conjunction.

Example: To avoid the traffic, Arturo and I left the stadium a few minutes before the game ended.

and—coordinating conjunction; before—subordinating conjunction

They say the prince is angry, yet he is smiling.

Tannen Industries is considering an expansion. The necessary equipment would be purchased for 18 million dollars, and the expansion would require an additional 2 million dollars investment in net operating working capital. The tax rate is 40 percent.

a. What is the initial investment outlay?

b. The company spent and expensed 20,000 dollars on research related to the project last year. Would this change your answer? Explain.

c. The company plans to use a building that it owns to house the project. The building could be sold for 1 million dollars after taxes and real estate commissions. How would that fact affect your answer?