1. As financial manager for Granger Inc. you need to make a decision on whether or not to recommend developing a new product line of suitcases. The new machinery would cost $2 million, plus $500,000 for delivery and installation. The manufacturing equipment, if purchased, qualifies as a 3-year asset under MACRS guidelines (corresponding percentages are 33%, 45%, 15%, and 7%). In order to produce the new line of suitcases, Granger will need to immediately increase its net working capital by $250,000. This new line of suitcases is expected to generate $2 million in revenue annually throughout its 7-year expected economic life. Operating costs are expected to be $500,000 annually. Granger expects the salvage value of the equipment to be $200,000. If Granger's marginal tax rate is 40%, and its cost of capital equals 11%, compute the project's net present value.
1) $2,524,940.83
2) $2,309,266.55
3) $2,487,507.52
4) $2,200,383.41
2. True or False? And why?
In the case where a levered firm acquires an unlevered firm, the acquiring firm can immediately use the additional borrowing capacity resulting from the acquisition to avoid a transfer of wealth from its stockholders to bondholders.