# Finance Wk 4 Homework Two problems

Question 1. (15 points) World Imports is evaluating the proposed acquisition of new equipment at a cost of \$90,000. In addition the equipment would require modifications at a cost of \$10,000 plus shipping costs of \$2,000. The equipment falls into the MACRS 3-year class, and will be sold after 3 years for \$35,000. The equipment would require increased inventory of 6,000. The equipment is expected to save the company \$35,000 per year in before-tax operating costs. The company’s marginal tax rate is 30 percent and its cost of capital is 11 percent.a. What is the cash outflow at Time 0?b. What are the net operating cash flows in years 1, 2, and 3?c. Calculate the non-operating terminal year cash flow.d. Calculate net present value. Should the machine be purchased?Question 2. (15 points) Paris Resorts is interested in developing a new facility in Montreal. The company estimates that the hotel would require an initial investment of \$10 million. The company expects that the facility will produce positive cash flows of \$3,000,000 a year at the end of each of the next 5 years. The project’s cost of capital is 12%.a. Calculate the expected net present value of the project.b. A hotel tax may be imposed that would affect cash flows. In one year, the company expects to know whether the tax will be imposed. The company believes there is a 40% change that the tax will be imposed, in which case annual cash flows will be \$2.5 million. If the tax is not imposed, annual cash flows will be \$3.2 million . It is deciding whether to proceed with the facility today or to wait 1 year to find out whether the tax will be imposed. If it waits a year, the initial investment will remain at \$10 million, and incoming cash flows will be delayed 1 year. Cost of capital will remain at 12%. If the company waits one year, calculate the project’s NPV in Year 1 with restrictions and without restrictions.c. Identify 3 qualitative factors in addition to the value of the real option that the company should consider in making its decision.