Question

Q1.Walker & Campsey wants to invest in a new computer system, and management has narrowed the choice to Systems A and B.

System A requires an up-front cost of $125,000, after which it generates positive after-tax cash flows of $80,000 at the end of each of the next 2 years.  The system could be replaced every 2 years, and the cash inflows and outflows would remain the same.

System B also requires an up-front cost of $125,000, after which it would generate positive after-tax cash flows of $60,000 at the end of each of the next 3 years.  System B can be replaced every 3 years, but each time the system is replaced, both the cash outflows and cash inflows would increase by 5%.

The company needs a computer system for 6 years, after which the current owners plan to retire and liquidate the firm.  The company's cost of capital is 12%.  What is the NPV (on a 6-year extended basis) of the system that adds the most value?  

Q2.Florida Enterprises, Inc. is considering a new project whose data are shown below.  The equipment that will be used has a 3-year class life and will be depreciated by the MACRS depreciation system.  Revenues and Cash operating costs are expected to be constant over the project's 10-year life.  What is the Year 1 after-tax net operating cash flow?

Q3.Schnusenberg Corporation just paid a dividend of $1.95 per share, and that dividend is expected to grow at a constant rate of 7.00% per year in the future.  The company's beta is 2.75, the required return on the market is 10.50%, and the risk-free rate is 3.00%.  What is the intrinsic value for Schnusenberg’s stock?

Answer 1