# Manufacturing Costs

Mars Inc. is considering the purchase of a new machine which will reduce manufacturing costs by \$5,000 annually.  The machine falls into the MACRS 3-yr class, (33%, 45%, 15%, and 7%) and it would be sold at the end of its 2-year operating life for \$1,800. The machine would require an increase in networking capital by \$2,000 when the machine is installed but the required working capital will return to the original level when the machine is sold after 2 years. Mars’s marginal tax rate is 40 percent, and it uses a 12 percent cost of capital to evaluate projects of this nature. If the machine costs \$6,000 and the installation cost is \$1,000, what is the project’s NPV? If the answer is \$123.45, enter 123.45 (two decimals). The Marcos Company issued \$100,000 of 30-year, \$1,000 par value bonds with a coupon rate of 7% ten years ago.  The bonds with a call price of \$1,040 were sold at a discount of \$30 per bond.

The initial flotation cost was \$6,000.  The company wishes to sell a \$100,000 new issue of 6%, 20-year bonds in order to retire its existing bonds.  The company intends to sell its new bonds at their face value of \$1,000 per bond.  The flotation costs of the new issue are estimated to be \$8,000.  The company’s marginal tax rate is 40% and the new bonds are sold three months before the old bonds are called. What is the annual net cash outflow (ANCO) on the old bonds? If the answer is \$5,500, just enter 5500 without a dollar sign or comma.  You are considering the purchase of a common stock that just paid a dividend of \$4.00 (D0 = \$4.00). You expect this stock to have a growth rate of 8 percent per year for two years from t=0 to t=2, and then to have a long‑run normal growth rate of 4 percent from t=2. If you require a 14 percent rate of return, how much should you be willing to pay for this stock?  For more information on Manufacturing Costs read this: https://en.wikipedia.org/wiki/Manufacturing_cost

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