Kinky copies may buy a high volume copier

15. Project Evaluation. Kinky Copies may buy a high-volume copier. The machine costs $100,000 and this cost can be fully depreciated immediately. Kinky anticipates that the machine actually can be sold in 5 years for $30,000. The machine will save $20,000 a year in labor costs but will require an increase in working capital, mainly paper supplies, of $10,000. The firm’s marginal tax rate is 21%, and the discount rate is 8%. Should Kinky buy the machine? (LO9-2)

17. Project Evaluation. Ilana Industries Inc. needs a new lathe. It can buy a new high-speed lathefor $1 million. The lathe will cost $35,000 per year to run, but it will save the firm $125,000 in labor costs and will be useful for 10 years. Suppose that, for tax purposes, the lathe is entitled to 100% bonus depreciation. At the end of the 10 year, the lathe can be sold for 100,000. The discount rate is 8%, and the corporate tax rate is 21%. What is the NPV of buying the new lathe? (LO9-2)

Chapter 6

1.

a. What is the current yield of the 4.75% 2041 maturity bond? What is its yield to maturity? (LO6-1)

b. The current yield is less than the yield to maturity whenever the bond price is greater than the face value.” True or false?

2. Bond Yields. A 30-year Treasury bond is issued with face value of $1,000, paying interest of $60 per year. If market yields increase shortly after the T-bond is issued, what happens to the bond’s: (LO6-1)

a. coupon rate?

b. Price ?

c.Yield to maturity?

d.Current Yield ?

3. Bond Yields. If a bond with face value of $1,000 and a coupon rate of 8% is selling at a price of

$970, is the bond’s yield to maturity more or less than 8%? (LO6-1)

5. Bond Pricing. A General Power bond carries a coupon rate of 8%, has 9 years until maturity,

and sells at a yield to maturity of 7%. (Assume annual interest payments.) (LO6-1 and LO6-2)

a.What interest payments do bondholders receive each year?

b.At what price does the bond sell?

c.What will happen to the bond price if the yield to maturity falls to 6%?

d.If the yield to maturity falls to 6%, will the current yield be less, or more, than the yield to maturity?