1. Mars Inc. is considering the purchase of a new machine which will reduce manufacturing costs by $5,000 annually. Mars will use the MACRS accelerated method to depreciate the machine, and it expects to sell the machine at the end of its 5-year operating life for $10,000. The firm expects to be able to reduce net operating working capital by $15,000 when the machine is installed, but required working capital will return to the original level when the machine is sold after 5 years. Mars's marginal tax rate is 40 percent, and it uses a 12 percent cost of capital to evaluate projects of this nature. If the machine costs $60,000.
a. -$15,394
b. -$14,093
c. -$58,512
d. -$21,493
e. -$46,901
2. Several years ago the Bakoj Company sold a $1,000 par value, noncallable bond that now has 20 years to maturity and a 7.00% annual coupon that is paid semiannually. The bond currently sells for $950, and the company’s tax rate is 42%. What is the component cost of debt for use in the WACC calculation?
4.81% 4.64% 4.12% 4.49% 4.34%