Corporate Finance Unit 6 Problems

Problem 11.6 Healthy Potions, Inc., a pharmaceutical company, bought a machine that produces pain-reliever medicine at a cost of $2 million five years ago. The machine has been depreciated over the past five years, and the current book value is $840,000. The company decides to sell the machine now at its market price of $1 million. The marginal tax rate is 34 percent. What are the relevant cash flows?Cash flows $ How do they change if the market price of the machine is $600,000 instead?Change in cash flow $ Problem 11.18 Healthy Potions, Inc., is considering investing in a new production line for eye drops. Other than investing in the equipment, the company needs to increase its cash and cash equivalents by $10,000, increase the level of inventory by $53,269, increase accounts receivable by $25,000, and increase accounts payable by $5,000 at the beginning of the project. Healthy Potions will recover these changes in working capital at the end of the project 12 years later. Assume the appropriate discount rate is 9.3 percent. What are the present values of the relevant investment cash flows? (Round answer to 2 decimal places, e.g. 15.25.)Present value $ Problem 11.28 You are thinking about delivering pizzas in your spare time. Since you must use your own car to deliver the pizzas, you will wear out your current car one year earlier, which is one year from today, than if you did not take on the delivery job. You estimate that when you purchase a new car, regardless of when that occurs, you will pay $22,000 for the car and it will last you five years. If your opportunity cost of capital is 8.6 percent, what is the opportunity cost of using your car to deliver pizzas? (Round answer to 2 decimal places, e.g. 15.25.)Opportunity cost $ Problem 12.24 Chip’s Home Brew Whiskey management forecasts that if the firm sells each bottle of Snake-Bite for $20, then the demand for the product will be 15,000 bottles per year, whereas sales will be 90 percent as high if the price is raised 16 percent. Chip’s variable cost per bottle is $10, and the total fixed cash cost for the year is $100,000. Depreciation and amortization charges are $20,000, and the firm has a 30 percent marginal tax rate. Management anticipates an increased working capital need of $3,000 for the year. What will be the effect of the price increase on the firm’s FCF for the year? (Round answers to nearest whole dollar, e.g. 5,275.)At $20 per bottle the Chip’s FCF is $ and at the new price Chip’s FCF is $ .Problem 12.28 Mick’s Soft Lemonade is starting to develop a new product for which the cash fixed costs are expected to be $78,000. The projected EBIT is $111,000, and the Accounting DOL is expected to be 2.1. What is the Cash Flow DOL for the firm? (Round answer to 2 decimal places, e.g. 15.25.)The Cash Flow DOL for the firm is .