2. J.B. Enterprises purchased a new molding machine for $85,000. The company pai

Question

2. J.B. Enterprises purchased a new molding machine for $85,000. The company paid $8,000 for shipping and another $7,000 to get the machine integrated with the company's existing assets. J.B. must maintain a supply of special lubricating oil just in case the machine breaks down. The company purchased a supply of oil for $4,000. The machine is to be depreciated on a straight-line basis over its expected useful life of 8 years. J.B. is replacing an old machine that was purchased 6 years ago for $50,000. The old machine was being depreciated on a straight-line basis over a ten year expected useful life. The machine was sold for $15,000. J.B.'s marginal tax rate is 40%. What is the amount of the initial outlay? (Points : 1)
$89,000
$87,000
$91,000
$85,000

3. A corporate bond has a face value of $1,000 and a coupon rate of 5%. The bond matures in 15 years and has a current market price of $925. If the corporation sells more bonds it will incur flotation costs of $25 per bond. If the corporate tax rate is 35%, what is the after-tax cost of debt capital? (Points : 1)
3.74%
4.45%
5.29%
6.78%

Explanation / Answer

1) Given the following annual net cash flows, determine the internal rate of return to the nearest whole percent of a project with an initial outlay of $750,000. YEAR NET CASH FLOW 1 $500,000 2 $150,000 3 $250,000 The IRR can be found by summing the cashflows, discounted with a rate r and putting that equal to the initial outlay. Solving for r gives you the IRR. In this case $750,000 = $500,000/(1+r) + $150,000/(1+r)^2 + $250,000/(1+r)^3 I find r= 11,45% or 11% rounded 4) If Depreciation expense in year one of a project increases for a highly profitable company net income decreases and incremental free cash flow increases please dont forget to rate my answer :)

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