Garage, Inc., is expected to maintain a constant 5 percent growth rate in its dividends, indefinitely. If the company has a dividend yield of 7.5 percent, what is the required return on the company s stock?

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13

Dec
Categories: General Questions

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Calculating ARR (average accounting return) for new manufacturing plant

You re trying to determine whether or not to expand your business by building a new manufacturing plant. The plant has an installment cost of $12 million, which will be depreciated straight line to zero over its four year life. If the plant has projected net income of $1,627,000, $1,512,000, $1,101,000, and $1,313,000 over these four years, what is the project s average accounting return (AAR)?

13

Dec
Categories: General Questions

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Comparing investment criteria: payback, NPV, IRR, profitability index

Consider the following two mutually exclusive projects:

Whichever project you choose, if any, you require a 15% return on your investment.

a) If you apply the payback criterion, which investment will you choose? Why?

b) If you apply the NPV criterion, which investment will you choose? Why?

c) If you apply the IRR criterion, which investment will you choose? Why?

d) If you apply the profitability index criterion, investment will you choose? Why?

e) Based on your answers in (a) through (d), which project will you finally choose? Why?

13

DecB.C. Rogers, Inc., is presented with the following two mutually exclusive projects. The required return is 15%.

a) What is the profitability index for each project?

b) What is the NPV for each project?

c) Which, if either, of the projects should the company choose?

13

Dec
Categories: General Questions

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13

Dec
Categories: General Questions

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13

Dec
Categories: General Questions

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Kurt s Auto Shop Analysis of Cost Cutting Proposals: should he buy the machine press?

Cost Cutting Proposals. Kurt s Auto Shop is considering a four year project to improve its production efficiency. Buying a new machine press for $450,000 is estimated to result in $195,000 in annual pretax cost savings. The press falls in the MACRS five year class, and it will have a salvage value at the end of the project of $90,000. The press also requires an initial investment in spare parts inventory of $18,000, along with an additional $3,000 in inventory for each succeeding year of the project. If the shop s tax rate is 34% and its discount rate is 15%, should Kurt s buy and install the machine press?