Burly Owl Inc. is going to purchase a new machine that will cost $200,000. The m
ID: 2646265 • Letter: B
Question
Burly Owl Inc. is going to purchase a new machine that will cost $200,000. The machine has a useful life of 4years and falls into the 3-year property class for the depreciation purposes. The IRS MACRS schedule for the four years is 1)33.33% 2)44.44% 3)14.82% 4)7.41% .It will generate $70,000 per year of savings for Burly and has not salvage value. Burly's corporate tax rate is 40%. In addition, Butly has 3000 outstanding 9% annual coupon bonds with a $1,000 par value, 15years to maturity and a price of $1085. Butly also has 100,000 shares of common stocks outstanding that is selling for $45 per share. This stock has a beta of 1.65, the expected market return is 12% and the risk-free rate is 5%. Finally, Burly has 26,000 shares of preferred stock outstanding that pays a $6.5 dividend and sells for $40 per share.
What are the operating cash flow for the machine for years 1-4?
What is the after-tax cost of debt for burly?
What is the cost of equity capital?
What is the cost of preferred capital?
What is Burly's WACC
The NPV of Burly's project is?
Explanation / Answer
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Year 0 1 2 3 4 Savings 70000 70000 70000 70000 Depreciation 66660 88880 29640 14820 EBIT 3340 -18880 40360 55180 Tax 1336 -7552 16144 22072 EAT 2004 -11328 24216 33108 Add: Depreciation 66660 88880 29640 14820 Initial investment -200000 Cash flow -200000 68664 77552 53856 47928Related Questions
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