Question

16. Four years ago, Cheese Snacks, Inc. purchased land located beside their factory at a price of $739,000. The land is currently valued at $825,000. The company is now considering building a new warehouse on that land. The construction cost of the warehouse is estimated at $425,000. In addition, $35,000 worth of grading will be required to prepare the construction site.

What is the initial cash outflow that should be used when analyzing this project?

a. $1,164,000

b. $1,199,000

c. $1,250,000

d. $1,285,000

e. $460,000 17.

You need a metal cutting machine for your operations. Your current machine is worn out so you are trying to decide which one of two machines to buy as a replacement. Whichever machine you purchase will likewise be replaced after its useful life. Machine A costs $221,000 and costs $16,000 a year to operate over a 3-year life. Machine B costs $190,000 and costs $21,000 to operate over a 2-year life.

Given this information, which one of the following statements is correct if the applicable discount rate is 9 percent?

a. Machine A cuts the annual cost by $25,702 as compared to machine B.

b. Machine B cuts the annual cost by $34,559 as compared to machine A.

c. The equivalent annual cost of machine A is -$261,501.

d. The equivalent annual cost of machine B is -$236,129.

e. You are indifferent between using either machine.

18. Suppose that two firms, A and B, are considering the same project which has the same risk as firm B’s overall operations. The project has an IRR of 14.0%. Firm A has a beta of 1.4, while firm B’s beta is 1.1. If the risk-free rate is 5.25% and the market risk premium is 7.0%, which firm(s) should take the project?

a. A only

b. B only

c. Both A and B

d. Neither A nor B

e. Cannot be determined without additional information

Answer 1

16.
=825000+425000+35000=1285000
Option D
17.
ANnual Cost of Machine A=(221000+16000/0.09*(1-1/1.09^3))*(0.09/(1-1/1.09^3))=103307.1
ANnual Cost of Machine B=(190000+21000/0.09*(1-1/1.09^2))*(0.09/(1-1/1.09^2))=129009.1
a. Machine A cuts the annual cost by $25,702 as compared to machine B.

18.
cost of capital of Firm A=5.25%+1.4*7%=15.05%
cost of capital of Firm B=5.25%+1.1*7%=12.95%
As IRR of project is more than cost of capital of Firm B, FIrm should only take the project
Option B