A factory has a $100,000 capital budget. Deter-mine which

Determine the current interest rate on the follow-ing securities, and explain why the interest rates aredifferent for these different bonds.(a)U.S. Treasury bond due in 5 years(b)General obligation bond of a municipal district,city, or a state due in 20 years(c)Corporate debenture bond of a U.S. industrialfirm due in 20 years 15-2

A small engineering firm has borrowed $125,000 at8%. The partners have invested another $75,000. Ifthe partners require a 12% rate of return, what is thefirms cost of capital:(a)Before taxes?(b)After taxes with a tax rate of 30%?(Answer:9.50%)

An engineering firm has borrowed $725,000 at 7%.The stockholders have invested another $600,000.The firms retained earningstotal $1.2M. The returnon equity is estimated to be 11%. What is the firmscost of capital:(a)Before taxes?(b)After taxes with a tax rate of 40%?

A firms stockholders expect a 15% rate of return,and there is $12M in common stock and retainedearnings. The firm has $5M in loans at an aver-age rate of 7%. The firm has raised $8M by sellingbonds at an average rate of 6%. What is the firmscost of capital:(a)Before taxes?(b)After taxes with a tax rate of 35%?

A firms stockholders expect an 18% rate of return,and there is $22M in common stock and retainedearnings. The firm has $9M in loans at an averagerate of 8%. The firm has raised $14M by sellingbonds at an average rate of 4%. What is the firmscost of capital:(a)Before taxes?(b)After taxes with a tax rate of 34%?

A firm has 40,000 shares whose current price is$80.75. Those stockholders expect a return of 15%.The firm has a 2-year loan of $900,000 at 6.4%. Ithas issued 12,500 bonds with a face value of 1000,15 years left to maturity, semiannualcompounding,a coupon interest rate of 6%, and a current priceof $1090. Using market values for debt and equity,what is the firms cost of capital:(a)Before taxes?(b)After taxes with a tax rate of 40%?

A firm has 60,000 shares whose current price is$45.90. Those stockholders expect a return of 14%.The firm has a 3-year loan of $1,900,000 at 7.3%. Ithas issued 22,000 bonds with a face value of 1000,20 years left to maturity, semiannualcompounding,a coupon interest rate of 7%, and a current price of$925.Using marketvalues for debt and equity, whatis the firms cost of capital:(c)Before taxes?(d)After taxes with a tax rate of 34%?

A public university wantsto applythe conceptof theWACC to developing its interest rate for analyzingcapital projects. It has an endowment of $68 millionwhich is earning 6.3% interest. It is paying 4.5%interest on $29 million inbonds.It believes that $94million in general funds from the taxpayers shouldbe assigned an interest rate of 13%. What is theuniversitys cost of capital? Note that only the inter-est on the endowment is available to fund capitalprojects.

Assume you have $2000 available for invest-ment for a 5-year period. You wish toinvestthemoneynot just spend it on fun things. There areobviously many alternatives available. You shouldbe willing to assume a modest amount of risk ofloss of some or all of the money if this is neces-sary, but not a great amount of risk (no investmentsin poker games or at horse races). How would youinvest the money? What is your minimum attractiverate of return? Explain.

There are many venture capital syndicates that con-sist of a few (say, eight or ten) wealthy people whocombine to make investments in small and (hope-fully) growing businesses. Typically, the investorshire a young investment manager(often an engineerwith an MBA) who seeks and analyzes investmentopportunities for the group.Would you estimate thatthe MARR soughtby this group is more or less than12%? Explain.

What is the interest rate on a 2-year certificate ofdeposit at a bank or credit union in your area? Whatis the mostrecentvalue ofthe ConsumerPrice Index(CPI)? If inflation matches that rate, what is the realrate of return on the 2-year CD? Include referencesfor the sources of your data.

What is the interest rate on a 4- or 5-year new carloan at a bank or credit union in your area? What isthe most recent value of the Consumer Price Index(CPI)? If inflation matches that rate, what is the realinterest rate you would pay on the car loan? Includereferences for the sources of your data.

Over the last 10 years, what has the inflation ratebeen? Compare this with the rate of return on theDow average over the same period. What has thereal rate of return for investing in this mix of stocksbeen? Include references for the sources of yourdata.

Over the last 10 years, what has the inflation ratebeen? Compare this with the rate of return on theNASDAQ average over the same period. What hasthe real rate of return for investing in this mix ofstocks been? Include references for the sources ofyour data.

A factory has a $100,000 capital budget. Deter-mine which project(s) should be funded and theopportunity cost of capital.Annual Life SalvageProject First Cost Benefits (years) ValueA$50,000 $13,500 5 $5000B50,000 9,000 10 0C50,000 13,250 5 1000D50,000 9,575 8 6000

Chips USA is considering the following projectsto improve their production process. Chips have ashort life, so a 3-year horizon is used in evaluation.Which projects should be done if the budget is$70,000? What is the opportunity cost of capital?ProjecFirst Cost Benefit1 $20,000 $11,0002 30,000 14,0003 10,000 6,00045,0002,4005 25,000 13,0006 15,000 7,0007 40,000 21,000

The National Motors Rock Creek plant isconsidering the following projects to improve thecompanys production process. Which projectsshould be done if the budget is $500,000? Whatis the opportunity cost of capital?AnnualLifeProject First Cost Benefit (years)1 $200,000 $50,000 152 300,000 70,000 103 100,000 40,000 54 50,000 12,500 105 250,000 75,000 56 150,000 32,000 207 400,000 125,000 5

The WhatZit Company has decided to fund sixof nine project proposals for the coming budgetyear. Determine the nextcapital budgetfor WhatZit.What is the MARR?Annual LifeProject First Cost Benefits (years)A$15,000 $ 4,429 4B20,000 6,173 4C30,000 9,878 4D25,000 6,261 5E40,000 11,933 5F50,000 11,550 5G35,000 6,794 8H60,000 12,692 8I75,000 14,058 8

Which projects should be done if the budgetis $100,000? What is the opportunity cost ofcapital?LifeAnnual SalvageProject (years) First Cost Benefit Val201 $20,000 $40002 20 20,000 3200 $20,0003 30 20,000 3300 10,0004 15 20,000 45005 25 20,000 450020,0006 10 20,000 58007 15 20,000 4000 10,000

Use the example risk-adjusted interest rates formanufacturing projects in Table 15-2. AssumeProjectBin Problem 15-15 is a new product in anew market. What is the interest rate for evaluatingthis project? Should it be done?

Use the example risk-adjusted interest rates formanufacturing projects in Table 15-2. AssumeProjectEin Problem 15-18 is a new product inan existing market. What is the interest rate forevaluating this project? Should it be done?

Use the example risk-adjusted interest rates formanufacturing projects in Table 15-2. AssumeProject 1 in Problem 15-19 is a new productin a for-eign market. What is the interest rate for evaluatingthis project? Should it be done?

Use the example risk-adjusted interest rates formanufacturingprojects in Table 15-2 andthe projectdata in Problem 15-18. Assume that each projectis to launch a new product. New products for theexisting market will have a life of 8 years. Newproducts for a related market will have a life of 5years. New products for a new market will havea life of 4 years. Which new products are recom- mended for funding? What is the total cost of theseprojects

Each of the following 10 independentprojects has a10-year life and no salvage value.UniformAnnualCost Benefits Rate ofProject (thousands) (thousands) Return1 $ 5 $1.03 16%2153.22173101.77124304.88105 5 1.19 206203.83147 5 1.00 158203.69139 5 1.15 1910 10 2.23 18 The projects have been proposed by the staff of theAce Card Company. The MARR of Ace has been12% for several years.(a)If there is ample money available, what projectsshould Ace approve?(b)Rank-order all the acceptable projects inaccording to desirability.(c)If only $55,000 is available, which projectsshould be approved?

Ten capital spending proposals have been madeto the budget committee as the members pre-pare the annual budget for their firm. Each inde-pendent project has a 5-year life and no salvagevalue.UniformInitial AnnualCost Benefit Rate ofProject (thousands) (thousands) ReturnA$10 $2.98 15%B15 5.58 25C51.5316D20 5.55 12E15 4.37 14F30 9.81 19G25 7.81 17H10 3.49 22I51.6720J10 3.20 18(a)Based on a MARR of 14%, which projectsshould be approved?(b)Rank-order all the projects according todesirability.(c)If only $85,000 is available, which projectsshould be approved?

At Miami Products, four project proposals (threewith mutually exclusive alternatives) are beingconsidered. All the alternatives have a 10-year use-ful life and no salvage value. ProjectCost Benefits Rate ofProposal (thousands) (thousands) ReturnProject 1Alt.A$25 $4.61 13%Alt.B50 9.96 15Alt.C10 2.39 20Project 2Alt.A20 4.14 16Alt.B35 6.71 14Project 3Alt.A25 5.56 18Alt.B10 2.15 17Project 4 10 1.70 11(a)Use rate of return methods to determinewhich setof projects shouldbe undertakenif thecapital budget is limited to about $100,000.(b)For a budget of about $100,000, what inter-est rate should be used in rationing capital bypresent worth methods? (Limit your answer toa value for which there is a compound interesttable available in Appendix C).(c)Using the interest rate determined in part(b), rank-order the eight different investmentopportunities by means of the present worthmethod.(d)For a budget of about $100,000 and theranking in part(c), which of the investmentopportunities should be selected?

Al Dale is planning his Christmas shopping forseven people. To quantify how much his variousrelatives would enjoy receiving items from a list ofprospective gifts, Al has assigned appropriatenessunits (called ohs) for each gift for each person(Table P15-27). A rating of 5 ohs represents a giftthat the recipient would really like. A rating of 4ohs indicates the recipient would like it four-fifthsas much; 3 ohs, three-fifths as much, and so forth.A zero rating indicates an inappropriate gift thatcannot be given to that person. Everyone must get agift TABLE P15-27DataOh Rating of Gift IfGivento Various FamilyMembersProspective GiftFatheMother Sister Brother Aunt Uncle Cousin1. $20 box of candy4 4 2 1 5 2 32. $12 box of cigars3 0 0 1 0 1 23. $16 necktie2 0 0 3 0 3 24. $20 shirt or blouse5 3 4 4 4 1 45. $24 sweater3 4 5 4 3 4 26. $30 camera1 5 2 5 1 2 07. $ 6 calendar0 0 1 0 1 0 18. $16 magazine subscription 4 3 4 4 3 1 39. $18 book3 4 2 3 4 0 310. $16 game2 2 3 2 2 1 2 The objective is to maximize total ohs that canbe obtained with the selected budget.(a)How much will it cost to buy the seven gifts thepeople would like best, if there is ample moneyfor Christmas shopping?(b)If the Christmas shopping budget is set at $112,which gifts should be purchased, and what istheir total appropriateness rating in ohs?(c)If the Christmas shoppingbudget must be cut to$90, which gifts should be purchased,and whatis their total appropriateness rating in ohs?

A financier has a staff of three people whosejob it is to examine possible business ventures forhim. Periodically they present their findingsconcerning business opportunities. On a particularoccasion, they presented the following investmentopportunities:Project A:This is a project for the use ofcommercial land the financier already owns.There are three mutually exclusive alterna-tives.A1. Sell the land for $500,000 A2. Lease the property for a car-washingbusiness. An annual income, after all costs(property taxes, etc.) of $98,700 would bereceived at the end of each year for 20years. At the end of the 20 years, it isbelieved that the property could be sold for$750,000.A3.Construct an office building on theland. The building will cost $4.5 millionto construct and will not produce any netincome for the first 2 years. The probabili-ties of various levels of rental income, after allexpenses, for the subsequent 18 years are asfollows:Annual Rental Income Probability$1,000,0000.11,100,0000.31,200,0000.41,900,0000.2The property (building and land) probably can besold for $3 million at the end of 20 years. Project B:An insurance company is seekingto borrow money for 90 days at 133/4%perannum, compounded continuously.Project C:A financier owns a manufacturingcompany. The firm desires additional work-ing capital to allow it to increase its inven-tories of raw materials and finished products.An investment of $2 million will allow thecompany to obtain sales that in the past thecompany had to forgo. The additional capitalwill increase company profits by $500,000 ayear. The financier can recover this additionalinvestment by ordering the company to reduceits inventories and to return the $2 million.For planning purposes, assume the additionalinvestment will be returned at the end of10 years.Project D:The owners ofSunrisemagazineare seeking a loan of $500,000 for 10 years ata 16% interest rate.Project E:The Galveston Bank has indicateda willingness to accept a deposit of any sumof money over $100,000, for any desired dura-tion, at a 14.06% interest rate, compoundedmonthly. It seems likely that this interest ratewill beavailable from Galveston,orsomeotherbank, for the next several years.ProjectF:A carrentalfirm is seekingaloan of$2 million to expand its fleet. The firm offers torepay the loan by paying $1 million at the endof Year 1 and $1,604,800 at the end of Year 2.If there is $4 million available for investmentnow (or $4.5 million if the ProjectAlandis sold), which projects should be selected?What is the MARR in this situation?If there is $9 million available for investmentnow (or $9.5 million if the ProjectAland issold), which projects should be selected?

The Raleigh Soap Company has been offered a5-year contract to manufacture and package a lead- ing brand of soap for Taker Bros. It is understoodthat the contractwill notbe extendedpastthe 5 yearsbecause Taker Bros. plans to build its own plant nearby. The contract calls for 10,000 metric tons(one metric ton equals 1000 kg) of soap a year.Raleigh normally produces 12,000 metric tonsof soap a year, so production for the 5-yearperiod would be increased to 22,000 metric tons.Raleigh must decide what changes, if any, to maketo accommodate this increased production. Fiveprojects are under consideration.Project 1:Increase liquid storage capacity.Raleigh has been forced to buy caustic sodain tank truck quantities owing to inadequatestorage capacity. If another liquid caustic sodatank is installed to hold 1000 cubic meters, thecaustic soda may be purchased in railroad tankcar quantities at a more favorable price. Theresult would be a saving of 0.1?c per kilogramof soap. The tank, which would cost $83,400,has no net salvage value.Project 2:Acquire another sulfonation unit.The present capacity of the plant is limitedby the sulfonation unit. The additional 12,000metric tons of soap cannot be produced with-out an additional sulfonation unit. Anotherunitcan be installed for $320,000.Project 3:Expand the packaging department.With the new contract, the packaging depart-ment must either work two 8-hour shifts orhave another packaging line installed. If thetwo-shift operation is used, a 20% wage pre-mium must be paid for the second shift. Thispremium would amount to $35,000 a year. Thesecond packaging line could be installed for$150,000. It would have a $42,000 salvagevalue at the end of 5 years.Project 4:Build a new warehouse. Theexisting warehouse will be inadequate forthe greater production. It is estimated that400 square meters of additional warehouseis needed. A new warehouse can be builton a lot beside the existing warehouse for$225,000,including the land.The annualtaxes,insurance, and other ownership costs wouldbe $5000 a year. It is believed the ware-house could be sold at the end of 5 years for$200,000. Project 5:Lease a warehouse. An alternativeto building an additional warehouse would beto lease warehouse space. A suitable ware-house one mile away could be leased for$15,000 per year. The $15,000 includes taxes,insurance, and so forth. The annual cost ofmoving materials to this more remote ware-house would be $34,000 a year.The contract offered by Taker Bros. is a favor-able one, which Raleigh Soap plans to accept.Raleigh managementhasseta 15%before-tax mini- mumattractiverateofreturnasthecriterionforanyofthe projects.Which projects shouldbe undertaken?

Mike Moores microbrewery is considering produc-tion of a new ale called Mikes Honey Harvest Brew.Toproducethisnewoffering,Mikeisconsideringtwoindependentprojects.Each of theseprojects hastwomutually exclusive alternatives, andeach alternativehasausefullifeof10yearsandnosalvagevalue.MikesMARRis8%.Informationregardingtheproje ctsandalternatives are given in the following tableAnnualProject/AlternativeCost BenefitProject 1. Purchase newfermenting tanksAlt.A: 5000-gallon tank $ 5,000 $1192Alt.B: 15,000-gallon tank 10,000 1992Project 2. Purchase bottle fillerand capperAlt.A: 2500-bottle/hour 15,000 3337machineAlt.B: 5000-bottle/hour 25,000 4425machine Use incremental rate of return analysis to completethe following worksheet.AnnualProj./Alt. Cost,PBenefit,A(A/P,i, 10) IRR1A$ 5,000 $1192 0.2385 20%1B1A5,000 800 0.16012A15,000 33372B2A10,000Use this information to determine:(a)which projectsshould befunded if only $15,000is available.(b)the cutoff rate of return if only $15,000 is avail-able.(c)which projects should be funded if $25,000 isavailable