FIN 571 Week 5 Individual Assignment DCF and WACC Problems

Please post the answers (and show your work) in the assignments section by midnight the last day of the week assigned.

1. Calculate the future value of 1,535 invested today for 8 years at 6 percent. (5 points)

2. What is the total present value of the following cash stream, discounted at 8 percent? (5 points)
Year Amount
1 400
2 750
3 945
4 145
5 78

3. If you invested $2,000 per year into an IRA for 30 years and received 6 percent return each year, what would the account balance be in 30 years? (5 points)

4. A friend gives you a proposition. If you give him 1,500 dollars today, he will guarantee your receive 12 percent a year for the next 5 years. How much money will you receive from him at the end of 5 years? (5 points)

5. You want to buy a new Computer Aided Design (CAD) system for your business. The cost of the system is $150,000 and you expect to save over $40,000 per year in reduced labor costs. Please calculate the net present value of the CAD if your required return is 10 percent and the life of the system is expected to be 5 years. (10 points)

6. Your company is considering converting its heating system in the main office from coal to heating oil. The initial cost of removing the coal fired furnace and installing an new oil fired unit is $60,000. The life of the analysis is 7 years. In the past you spent $25,000 per year on coal. The new company says you will spend no more than $15,000 per year on heating oil. If your required return is 12 percent, should you make this investment? Please calculate the net present value of this project. (10 points)

7. You have collected the following information:

a. the yield on your company’s preferred stock 8%
b. the yield on your company’s debt 10%
c. the required return on your company’s common stock and internal equity 12%
d. debt total $5,000,000
e. preferred stock current market value $10,000,000
f. common stock and retained earnings total value $20,000,000

Please calculate the pre-tax weighted average cost of capital (WACC) for your company.
(10 points)

8. Your company’s marginal income tax rate is 40%. Please calculate the post-tax WACC from the information provided in problem 7. (10 points)
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