1. Andover Inc., had a current share price of $34, and the firm had 5,000,000 shares of stock outstanding. The company is considering an investment project that requires an immediate $62,000,000 investment but will produce a stream of cash flow of $35,000,000 each year over the next 3 years then close. There is no salvage value. If Andover invests in the project, what would the new share price be? Andover's cost of capital is 12%. (Hint: consider how the project NPV affects the stock price)
a. $42.06
b. $43.80
c. $38.41
d. $37.27
e. $35.63
2. Lowell Textiles is analyzing two machines to determine which one it should purchase. Whichever machine is purchased will be replaced at the end of its useful life. The company requires a 12 percent rate of return and uses straight-line depreciation to a zero book value over the life of the machine. Machine A has a cost of $450,000, annual operating costs of $30,000, and a 3-year life. Machine B costs $301,000, has annual operating costs of $55,000, and a 2-year life. The firm currently pays no taxes. Which machine should be purchased and why?
a. Machine A; because it will save the company about $19,215 a year
b. Machine A; because it will save the company about $15,744 a year
c. Machine B; because it will save the company about $17,310 a year
d. Machine B; because it will save the company about $16,315 a year
e. Machine B; because it will save the company about $15,298 a year