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effective interest rate remains at 8.16 percent, how much will you receive during each
of the 10 years? (10 points)
n=40; PMT=350; i=4%; FV=33,259.
PV=33,259, i=8.16, n=10, PMT = $4,992.40
7. The MJM Corporation has two different bonds currently outstanding. Bond A has a
face value of $10,000 and matures in 10 years. The bond makes no payments for the
first four years, then pays $500 every six months over the next three years and then
pays $750 every six months over the last three years. Bond B also has a face value of
$10,000 and a maturity of 10 years; it makes no coupon payments over the life of the
bond. If the required rate of return on both bonds is 14 percent compounded
semiannually, what is the current price of bond A? Of bond B? (10 points)
PVA=5,357.68; PVB=2584.19
8. Stanton Inc. is considering the purchase of a new machine which will reduce
manufacturing costs by $5,000 annually and increase earnings before depreciation
and taxes by $6,000 annually. Stanton will use the MACRS method to depreciate the
machine. It expects to sell the machine at the end of its 5-year operating life for
$10,000 before taxes. Stanton's marginal tax rate is 40 percent, and it uses a 9 percent
cost of capital to evaluate projects of this type. The machine costs $40,000. (15
points)
a. What is the operating cash flow in year 2?
OCF=(6000+5000)(1-.4) + D(.4) = 11,720
I also gave credit if you assumed that the reduction in expenses was included in the 6000.
This gave a cash flow of 8720 and a NPV of (9377.64)
b. What is the non-operating cash flow in year 5?
CF(SV)=10,000-(10,000-2,304)(.4)=6,921.60
c. What is the NPV of the project?
NPV=2,291.3
Year
1
2
3
4
5
6
5-Year Macrs
20%
32%
19.2%
11.52%
11.52%
5.76%
Depreciation
8,000
12,800
7,680
4,608
4,608
2,304
OCF
9,800
11,720
9,672
8,443
8,443