Help with questions 2-4 on attached document
1.(25 points) a) Your firm is contemplating the purchase of a new $500,000 computer-based order entry system. The system will be depreciated straight-line to zero over its five-year life. It will be worth $50,000 at the end of that time. You will save $150,000 before taxes per year in order processing costs, and you will be able to reduce net working capital by $70,000. If the tax rate is 30 percent, what is the IRR for this project? b) In the previous problem you used straight line depreciation. This time use the MACRS 3-year depreciation schedule and answer the question again. (The project is still 5 years long). 2. Your company is considering purchasing one of two machines: Machine A costs $2,600,000 and will last for six years. Variable costs are 35% of sales and fixed costs are $195,000 per year. Machine B costs $5,200,000 and will last for nine years. Variable costs are 30% of sales and fixed costs are $230,000 per year. Your sales, regardless of the machine used will be $10 million per year. Your required return is 10% and your tax rate is 35%. Both machines will be depreciated straight line to zero over its useful life. Both machines will have a salvage value at the end of its life of 10% of the original purchase price. Calculate the EAC for both machines and determine which machine should be chosen. 3.(15 Points) Given the following information for Watson Power Co., find the WACC. Assume the company’s tax rate is 35%. Debt: 10,000 6.0 percent coupon bonds outstanding with 20 years to maturity, selling at $1100. Coupon payments are made once a year. Common Stocks: 495,000 shares outstanding, selling for $64 per share. Recently paid a dividend of $4.00 and has an expected growth rate of 5%. Preferred Stocks: 35,000 shares of 5% preferred stocks outstanding, currently selling at par. 4. Your company is looking at setting up a manufacturing plant overseas to manufacture driverless flying cars. The company bought some land in that country three years ago for $2.7 million. The land was just appraised for $3.8 million after tax. The proposed project will last five years. It is expected that you can sell the land at the end of 5 years for $4.1 million. The manufacturing plant will cost $34 million to build. The following market data on your company are current. Debt:187,000 bonds with a coupon rate of 6.3 percent outstanding, 25 years to maturity, selling for 108 percent of par; the bonds make semiannual payments. Common Stock:8,100,000 shares outstanding, selling for $66 per share; the beta is 1.15. Preferred Stock:4500,000 shares of 4.25 percent preferred stock outstanding, selling for $83 per share. Market:7 percent expected market risk premium; 3.1 percent risk free rate. Your underwriter tells you the floatation costs for common stock, preferred stock, and debt are 6%, 5%, and 3% respectively. They recommend you raise all needed funds for the project by issuing new debt because it has the lowest cost and will be even lower once you consider your corporate tax rate of 25%. The project requires $1.7 million in initial net working capital. a) This project is riskier than the typical project that your company normally undertakes. You have been told to adjust the risk factor by +2 percent. Calculate the appropriate discount rate to use when evaluating this project. b) Calculate the average cost of floatation. c) Calculate the project’s initial Time 0 cash flow (CFFA) taking into account all side effects. Assume floatation only affects your capital investments, not your net working capital. d) The manufacturing plant uses a 7 years MACRS schedule for depreciation. At the end of the project (that is at the end of 5 years) the plant and equipment can be scrapped for $3.9 million. What is the after tax salvage value of this plant and equipment? e) The company will incur $6.9 million in annual fixed costs. The plan is to manufacture 125 driverless flying cars per year and sell them for $1,500,000 each; the variable costs are $935,000 per unit. What is the annual operating cash flow (OCF) per year for the project? f) What is the IRR and NPV of this project? https://www.chegg.com/homework-help/questions-and-answers/company-looking-setting-manufacturing-plant-overseas-manufacture-driverless-flying-cars-co-q55074698?trackid=110ad6e3fdb6&strackid=91f437fbc40f