SHOW WORK ON EXTRA SHEETS FOR MAXIMUM/PARTIAL CREDIT. I. (25 pts overall) Analys

SHOW WORK ON EXTRA SHEETS FOR MAXIMUM/PARTIAL CREDIT.
I. (25 pts overall) Analysts at Chatman Machine Shop are evaluating the replacement of the firm’s widget adjusting machine. They call this Project W. The new machine will cost $4,200,000 and be depreciated over a three-year life using straight line. At the end of three years, this machine will have a market value of $210,000. This new machine is expected to increase revenues by $3,100,000 and increase operating expenses by $990,000. Due to the expectation of increased revenues, accounts receivables will be increased by $300,000 at the onset of the project and are expected to be fully recovered at the end of the project.
The old machine was originally purchased 3 years ago for $2,500,000. It is being depreciated using the MACRS system as a 3-year asset. Its current market value is $175,000.
The firm’s tax rate is 30%, and the cost of capital is 18%.
MACRS rates for three-year assets:
Year 1: 33.33% Year 2: 44.44% Year 3: 14.82% Year 4: 7.41%
The analysts need your help in determining the net present value of this project and deciding whether to ACCEPT or REJECT the replacement option given in Project W.
Answer the following:
Fill in the table with values to the nearest dollar (i.e., no decimals required):
The value of each box is based on the items needed to calculate a value for the box. The entire table is worth 21 points.
Time Investment CF Operating CF Net working capital CF Total CF
0
1
2
3
NPV ________________ (2 pts); your value should be based on items in the last column of table.
Decision________________ (2 pts); zero points awarded if no answer on the blank above.
II. (25 pts overall) Consider the following information about Federated Junkyards of America (FJA):
• Debt: $75,000,000 book value outstanding, trading at 90% of book value. The debt has a remaining maturity of 10 years, and pays a semiannual coupon. The coupon rate is 7.5%.
• Common equity: 2,500,000 shares selling at $42 per share. The company just paid a dividend of $3.75, and the growth in dividends is expected to be a constant 8% indefinitely.
• Preferred equity: 200,000 shares selling at $85 per share. The dividend rate is 10%.
• Taxes: FJA’s marginal tax rate is 35%.
a. Compute the weighted average cost of capital for FJA.
(2 pts) Total value of the company ______________________
Use 2 values after the decimals for all item below:
Capital structure (2 pts each):
________% debt
________% common
________% preferred
(2 pts each) Before tax cost of components:
________% for debt, ________% for common, ________% for preferred
(2 pts each) After tax cost of components:
________% for debt, ________% for common, ________% for preferred
(5 pts) Weighted average cost of capital: ________%