Please answer all the 3 Exercises and show all computations. Thanks Business Fin

Question

Please answer all the 3 Exercises and show all computations. Thanks

Business Finance Chapter 10 Exercises ***Please show all computations to receive full credit*** Exercise 1 a) What is the payback period for an investment that costs $80,000 and provides an annual after-tax b) What is the payback period for an investment that costs $120,000 and provides an annual after-tax c) Assuming at the time of investment both "a" and "b" have the same probability of achieving their benefit (cash flow) of $12,200? benefit (cash flow) of $28,000? projected annual cash flows, which one would you consider to be the riskier investment, and why? (note: a lengthy answer isn't needed here; the purpose of part c is to ensure students understand how to interpret the calculated payback periods in relation to each other and correctly use the info for decision-making) Exercise 2 a) Calculate the tax savings for a company in the 39% tax bracket with $200,000 in interest payments. b) Using your answer to part "a," how might this be an incentive or disincentive to use debt to finance additional capital investments? (again, a lengthy answer isn't needed here - think pro and con; you may also find it helpful to refer back to financial statements in the text - Chapter 3) Exercise 3 Ella Vader purchased a special oven for her pizza restaurant that cost $400,000. She put down $100,000 and will finance the remainder. Ella's opportunity cost is 3 percent, and the lender is charging her a 9 percent interest rate on the loan a) Calculate the weighted average cost of capital (WACC). b) Generally speaking, is it preferable to have a higher or lower WACC, and why? (again, no need to write a novel for this one either@) Page 1 of 1

Explanation / Answer

1a)

Investment (C): $80000

Annual Benefit(I): $12200

Paayback Period = C/I = 80000/12200 =6.6 years

1 b)

Investment (C): $120000

Annual Benefit(I): $28000

Paayback Period = C/I = 120000/28000 =4.3 years

1 c) Investment A will be riskier since he Payback time is higher and in longer run probabilities may change.

2 a) Question is incomplete tax in 39% tax bracket and interest rate or cost of capital is not mentioned

2 b) Dependant on above question

3 a)

Ella's investment (E) = $ 100000

Cost of Restaurant (V)= $ 400000

Debt required (D)= V-E = $400000-$100000 = $30000

Ella's opportuinty cost (Re)= 3%= 0.03

Cost of capital (Rd)= 9%= 0.09

Tax Rate (Tc) = 0 (assumption)

WACC = E/V * Re + D/V*Rd * (1-Tc)

= 100000/400000*0.03 + 300000/400000 * 0.09 * (1-0)

= 0.25*0.03 + 0.75 * 0.09

WACC = 0.075 = 7.5%

3 b) WACC should be as low as possible because it is the cost of capital of your business. It is the intterest you pay for he capital invested for yoour business.

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