Finance Homework

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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’s opportunity cost of capital is 17.0 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

4,300

7,000

 

2

3,600

7,000

 

3

2,950

7,000

 

4

2,200

7,000

 

5

1,500

7,000

 

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

The NPV of each choice is:

NPV0 = $

NPV1 = $

NPV2 = $

NPV3 = $

NPV4 = $

NPV5 = $

Suggest when should Bell Mountain buy the new accounting system?

Bell Mountain should purchase the system in year 4year 5year 1year 2year 3.

 

Problem 12.24

 

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 91 percent as high if the price is raised 18 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.)

At $20 per bottle the Chip’s FCF is $ ­­­and at the new price Chip’s FCF is $.

 

Problem 13.11

 

Capital Co. has a capital structure, based on current market values, that consists of 41 percent debt, 5 percent preferred stock, and 54 percent common stock. If the returns required by investors are 10 percent, 12 percent, and 16 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%.)

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