Solution Library

Evaluate Projects with Cash Flows

Question Your company’s cost of capital is 12%.  You are currently evaluating three projects that have the following cash flow streams:   Cash Flows at Time t Project 0 1 2 3 4 A -10,000 4,000 4,000 4,000 ... Read More

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Calculating NPV for Two Potential Projects

Question Tri-City Industries is considering two possible capital projects. Project A requires an initial investment of $240,000 and provides cash flows before tax of $120,000 in year one, $140,000 in year two, and $160,000 in year three. If project A is accepted, project B may be undertaken. It pro ... Read More

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How to Calculate the Present Value of New Equipment

Question PC Shopping Network may upgrade its modem pool. It last upgraded 2 years ago, when it spent $115 million on equipment with a life of 5 years and a salvage value of $15 million. The old equipment can be sold today for $80 million. A technology consultant hired by PC Shopping Network has sug ... Read More

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Comparison of Depreciation between Two Machines

Question You have been asked to choose between two pollution devices. The “Wet Scrub” costs $1,000 to set up and $500 per year to operate. It must be completely replaced every 3 years and it will have a salvage value of $100 when replaced. The “Dry Scrub” device costs $2,000 ... Read More

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Calculate Returns for a New Machine for the Next 10 Years

Question Kenneth Su Gold Corp (KSGC) is considering the purchase of a new piece of machinery. The new machinery would cost $80,000. You are given the following facts: The new machine will replace an existing machine that has a current market value of $30,000. The new machine would reduce before ... Read More

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Prepare a CCA table with UCC and Annual Tax Shield

Question Nortel is considering the purchase of a new call routing system.  The system will cost $50M to purchase, an additional $7M to install, and will last for 30 years.  The CCA rate associated with the system is 6%, the firm’s margin tax rate is 20%, and the firm’s WACC is ... Read More

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Calculating the Highest Returns from Potential Projects

Question Your division has been allocated $15M for capital projects for the coming year.  You`ve been able to identify five potential projects, as outlined in the table below, each of which will last 10 years. Project Name   Initial Cost    Annual Cash Flows &nbs ... Read More

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Capital Cost Allowance for New Machine and Old Machine Being Sold Off

Question Your firm purchased a line of computer equipment for $1.5M four years ago. It is assigned a CCA rate of 20% and the firm has a tax rate of 35%.  At the end of this year (year 4 for the machine) you decide to sell the computer equipment and as a result you will terminate the asset pool ... Read More

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Determining Optimal Time for undertaking new product expansion

Question HV Inc. is trying to determine the optimal time to undertake a product expansion. The project will require an initial investment of $15M and the firm has a WACC of 3%. Theexpansion is estimated to last 8 years, and if it is undertaken today, the annual cash flows associated with it will be ... Read More

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Calculation of Capital Cost Allowance with net profit, tax rate and weighted average cost of capital

Question PAC Corp. is going to purchase a new line of technology. It will cost $4M and will be salvaged for $0.5M in six years. Due to the advanced nature of the technology, it can beclassified in one of two CCA categories, which have a CCA rate of 20% and 40%, respectively. Which CCA rate should y ... Read More

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Optimum Capital Structure and Weighted Average Cost of Capital

Question (a). The calculation of the Weighted Average Cost of Capital (WACC) is theoretically simple but practically difficult. Discuss. (b). Two-fifths of the total market value of Jefferson plc consists of loan stock with a cost of 10%. Nelson plc is identical to Jefferson except that its capital ... Read More

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Is Company's Primary Aim to Maximize Shareholders' Wealth or Share Price

Question a. The primary financial objective of a company is the maximization of the wealth of shareholders …per corporate finance theory.    However, this objective is usually replaced by the surrogate objective of maximization of the company’s share price.  &n ... Read More

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