"8 #22 A firm is considering an investment in a new machine with a price of $11.5 million to replace its existing machine.

"8 #22 A firm is considering an investment in a new machine with a price of $11.5 million to replace its existing machine. The current machine has a book value of $3 million, and a market value of $5.2 million. The new machine is expected to have a four-year life, and the old machine has four years left in which it can be used. If the firm replaces the old machine with the new machine, it expects to save $2.5 million in operating costs each year over the next four years. Both machines will have no salvage value in four years. If the firm purchases the new machine, it will also need an investment of $190,000 in net working capital. The required return on the investment is 10%, and the tax rate is 40%. a. What is the NPV and IRR of the decision to replace the old machine? b. Ignoring the time value of money, the new machine saves only $10 million over the next four years and has a cost of $11.5 million. How is it possible that the decision to replace the old machine has a positive NPV?9 - #20 Your buddy comes to you with a sure fire way to make some quick money and help pay off your student loans. His idea is to sell T-shirts with words “I get” on them, “You get it?” He says, “You see all those bumper stickers and T-shirts that say, ‘got milk’ or ‘got surf’. So this says, ‘I get.’ It’s funny! All we have to do is buy a used silk screen press for $3,500 and we are in business!” Assume there are no fixed costs, and you depreciate the $3,500 in the first period. Further, taxes are 30%. a. What is the accounting break-even point if each shirt costs $6.50 to make and you can sell them for $13.00 apiece? Now assume one year passed and you have sold 5,000 shirts! You find out that the Dairy Farmers of America have copyrighted the “got milk” slogan and are required you to pay $15,000 to continue operations. You expect the craze will last for another three years and that your discount rate is 12%. b. What is the financial break-even point for your enterprise now?9- #24 Applied Nanotech is thinking about introducing a new surface cleaning machine. The marketing department has come up with the estimate that Applied Nanotech can sell 10 units per year at $185,000 net cash flow per unit for the next five years. The engineering department has come up with the estimate that developing the machine will take a $7 million initial investment. The finance department has estimated that a 13% discount rate should be used. a. What is the base-case NPV? b. If unsuccessful, after the first year the project can be dismantled and will have an after-tax salvage value of $3.2 million. Also, after the first year, expected cash flows will be revised up to 20 minutes per year or to 0 units, with equal probability. What is the revised NPV?11 - # 16 A stock has a beta of 1.15 and an expected return of 14%. A risk-free asset currently earns 4.2%. a. What is the expected return on a portfolio that is equally invested in the two assets? b. If a portfolio of the two assets has a beta of .75, what are the portfolio weights? c. If a portfolio of the two assets has an expected return of 8%, what is its beta? d. If a portfolio of the two assets has a beta of 2.30, what are the portfolio weights? How do you interpret the weights for the two assets in this case? Explain. "