Adams food service has issued 7 3/8% bonds that mature on July 15th, 2042. The bonds are callable $1,037.08 on July 15th, 2017. Assume that interest is paid and compounded annually. Determine the yield to maturity (to the nearest 10th of 1%) if an investor purchased a $1,000 denomination bond for $900 on July 15 2010.
Nguyen, Inc., is considering the purchase of a new computer system (ICX) for $130,000. The system will require an additional $30,000 for installation. If the new computer system is purchased, it will replace an old system that has been fully depreciated. The new system will be depreciated under the MACRS rules applicable to 7-year class assets. If the ICX is purchased, the old system will be sold for $20,000. The ICX system, which has a useful life of 10 years, is expected to increase revenues by $32,000 per year over its useful life. Operating costs are expected to decrease by $2,000 per year over the life of the system. The firm is taxed at 40 percent marginal rate. (Hint: See Appendix 9A for information on MACRS depreciation. Except for the depreciation method, this problem is the same as problem 10.)
1. What net investment is required to acquire the ICX system and replace the old system?
2. Compute the annual net cash flows associated with the purchase of the ICX system.Fred and Frieda have always wanted to enter the blueberry business. They locate a 50- acre piece of hillside in Maine that is covered with blueberry bushes. They figure that the annual yield from the bushes will be 200 crates. Each crate is estimated to sell for $400 for the next 10 years. This price is expected to rise to $500 per crate for all sales from years 11 through 20.
In order to get started, Fred and Frieda must pay $150,000 for the land plus $20,000 for packing equipment. The packing equipment will be depreciated on a straight-line basis to a zero estimated salvage value at the end of 20 years. Fred and Frieda believe that at the end of 20 years, they will want to retire to Florida and sell their property.
Annual operating expenses, including salaries to Fred and Frieda and exclusive of depreciation, are estimated to be $50,000 per year for the first 10 years and $60,000 thereafter. The land is expected to appreciate in value at a rate of 5 percent per year. The couple’s marginal tax rate is 30 percent for both ordinary income and capital gains and losses.
a. If the couple requires at least a 13 percent return on their investment, should they enter the blueberry business?
b. Assume that the land can be sold for only $50,000 at the end of 20 years (a capital loss of $100,000). Should the couple invest in the land and blueberry business? (Assume that the couple may claim the full amount of their capital loss in the year it occurs—year 20).
Chapter 11
Fox Enterprises is considering expanding into the growing laser copier business. Fox estimates that this expansion will cost $1.8 million and will generate a 20 year stream of expected net cash flows amounting to $400,000 per year. The company''s weighted cost of capital is 15%.
A. Compute the net present value of the laser copier project using the company''s weighted cost of capital and the expected cash flows from the project.
B. Using the risk-adjusted discount rate approach, management has decided that this project has substantially more risk than average and has decided that it requires a 24 percent expected rate of return on projects like this. Recompute the risk-adjusted net present value of this project.