1. You work for a company whose primary long term financial goal is to undertake projects that maximize company value. You have been asked to provide a recommendation with respect to selecting one of two mutually exclusive projects. The first project has an NPV of $150K and an IRR of 10%. The second has an NPV of $120K and an IRR of $12.5%. Which project should you recommend and why?
2. If a company depreciates an asset, purchased for $10M, over seven years using the straight-line method, what is the total depreciation expense at the end of year 5?
3. If a company has assets of $8M, total liabilities of $5M, and net cash flow of $1M per month, what is the company's equity?
4. Proust Manufacturing Co. produces personal fitness machines. The once successful line is no longer selling well, so the company is considering production of a new improved cardio-vascular machine. This can be done by buying needed production equipment. There is a six-month manufacturing, delivery, setup, and training delay before the equipment will be ready for production. The company wants to start producing the new cardio machine in January next year. Two options are available - lease or buy. Buy Option - The entire purchase price of the production equipment is $600K and is due at the time of the order. The cost of capital for this purchase is 10%. Assume there are no taxes. Lease Option - A $25K deposit is due at the time of the order. The remaining portion of the first year's lease payment ($160K) is due in January next year. The other three annual lease payments ($185K each) are due in January of production years 2, 3, and 4. The cost of capital for leasing is also 10%. Revenue from sales of the new cardiovascular machines is expected to be:
• Year 1 - $380,000
• Year 2 - $260,000
• Year 3 - $145,000
• Year 4 - $80,000
Calculate the net present value of both the new purchase option and the lease option. Show all work. Determine the best option for Proust and justify your answer.