Question 1: (NPV and shareholder wealth) Stockholders are surprised to learn that the firm has invested $43 million in a project that has an expected payoff of $8 million per year for six years. The project's cost of capital is 12%.
a. What is the project's NPV?
b. There are 3 million outstanding shares. What should be the direct impact of this investment on the per-share value of the common stock?
Question 2: (Net investment outlay) The cost of a new machine is $70,000 plus an additional $8,000 for freight and setup costs. The old machine that is being replaced has a book value of $15,000 and can be sold for $7,000. An investment of $15,000 in working capital is also required. The marginal tax rate is 30%. What is the net investment outlay?
Question 3: The total present value of all costs associated with an asset over a seven-year life is $73,285. If the asset has a cost of capital of 11%, what is the EAC of using this asset?