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27/08/2022
Ch8:A6. (Calculating the WACC) Getty’s required return for equity, re , is 18%. Its required return for debt, rd , is 6%; its debt-to-total-value ratio, L, is 45%; and its marginal tax rate, T, is 40%. Calculate Getty’s WACC.A7. (Finding NPVs with differing project risks) Assume the expected return on the market portfolio is 15% and the riskless return is 9%. Also assume that all of the projects listed here are perpetuities with annual cash flows (in $) and betas as indicated. None of the projects requires or precludes any of the other projects, and each project costs $2,000.a. What is the NPV of each project?b. Which projects should the firm undertake?F270 385 4501.00 2.25 2.22 0.65 1.37 2.36Ch9:B3. (NPV) Truman State University is evaluating an investment in new air handling systems for some of its major buildings. The expected outlays and the expected savings, in millions of dollars, are given here:TIME 0 1 2 3 4 THROUGH 10Outlays 2.0 3.0 4.0 0 0Savings 0 0.5 1.0 1.5 2.0B6. (Investment criteria) Consider the cash flows for the two capital budgeting projects given here. The cost of capital is 10%.a. Calculate the NPV for both projects.b. Calculate the IRR for both.c. Calculate the PI for both.d. Calculate the MIRR for both.e. Calculate the payback for both.f. Which is the better project? Why?YEAR 0 1 2 3 4Project A −25,000 10,000 10,000 10,000 10,000Project B −12,500 5,000 5,000 5,000 5,000Ch10:B2. (Incremental cash flows and NPV) The Canton Sundae Corporation is considering the replacement of an existing machine. The new machine, called an X-tender, would provide better sundaes, but it costs $120,000. The X-tender requires $20,000 in setup costs that are expensed immediately and $20,000 in additional working capital. The X-tender’s useful life is 10 years, after which it can be sold for a salvage value of $40,000. Canton uses straight-line depreciation, and the machine will be depreciated to a book value of zero on a six-year basis. Canton has a tax rate of 45% and a 16% cost of capital on projects like this one. The X-tender is expected to increase revenues minus expenses by $35,000 per year. What is the NPV of buying the X-tender?
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