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    Capital Budgeting for Tunney Industries

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    1. Cost of preferred Tunney industries can issue perpetual preferred stock at a price of $47.50 a share. The stock would pay a constant annual dividend of $3.80 a share.

    What's the company's cost of preferred stock, rp?

    2. New project analysis:

    Campbell Company is evaluation the proposed acquisition of a new milling machine. The machine's base price is $108,000, and it would cost another $12,500
    to modify it for special use by your firm. The machine falls into the MACRS 3-years class, and it would be sold after 3 years for $65,000. The machine would require and increase in net working capital (inventory) of $5,500. The milling machine would have no effect on revenues, but it is expected to save the firm $44,000 per year in before-tax operating costs, mainly labor. Campbell's marginal tax rate is 35 percent., and the WACC is 12 %. Also, the firm spent $5k last year investigating the feasibility of using the machine.

    a. How should the $5k spent last year be handled?
    b. What is the cost of the machine for capital budgeting purposes, that is the Year 0 project cash flow?
    c. What are the net operating cash flows during Year 1,2 and 3?

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    1. Cost of preferred Tunney industries can issue perpetual preferred stock at a ...

    Solution Summary

    The solution examines capital budgeting for Tunney industries.