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6.20 Here are the cash flows for two mutually exclusive projects:

Project C0 C1 C2 C3
A ($20,000) $8,000 $8,000 $8,000
B ($20,000) 0 0 $25,000

a. At what interest rates would you prefer project A to B?

b. What is the IRR of each project?

7.21 Revenues generated by a new fad product in each of the next 5 years are forecasted as follows:

Year Revenues
1 $40,000
2 30,000
3 20,000
4 10,000
Thereafter 0

Expenses are expected to be 40 percent of revenues, and working capital required in each year is expected
to be 20 percent of revenues in the following year. The product requires an immediate investment of
$50,000 in plant and equipment.

a. What is the initial investment in the product? Remember working capital.

b. If the plant and equipment are depreciated over 4 years to a salvage value of zero using straight-line
depreciation, and the firm's tax rate is 40 percent, what are the project cash flows in each year?

c. If the opportunity cost of capital is 10 percent, what is the project NPV?

d. What is the project IRR?

11.10 Find the WACC of William Tell Computers. The total book value of the firm's equity is $10 million; book value
per share is $20. The stock sells for a price of $30 per share, and the cost of equity is 15 percent. The firm's
bonds have a par value of $5 million and sell at a price of 110 percent of par. The yield to maturity on the bonds
is 9 percent, and the firm's tax rate is 40 percent.

Please see the attachments for the questions. Answers are to be completed in Excel

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Solution Summary

Solution answers 3 questions
1) Calculates IRR;
2) Calculates project cash flows, NPV, and IRR;
3) Calculates the Weighted Average Cost of Capital

See Also This Related BrainMass Solution

Wendy capital budgeting project NPV IRR WACC MACRS

Wendy is evaluating a capital budgeting project that should last for 4years. The project requires $800,000 of equipment. She is unsure what depreciation method to use in her analysis, straight-line or the 3-year MACRS accelerated method. Under straight-line depreciation, the cost of the equipment would be depreciated evenly over its 4-year life (ignore the half-year convention for the straight-line method). The applicable MACRS depreciation rates are 33%, 45%, 15%, and 7%, as discussed in Appendix11A. The company 's WACC is 10%,and its tax rate is 40%.

a. What would the depreciation expense be each year under each method?

b. Which depreciation method would produce the higher NPV, and how much higher would it be?

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