Problem 8: John Piderit, the general management of the
Western Tool Company, is considering introducing some
new tools to the company’s product line. The top
management of the firm has identified three types of tools
(referred to as projects A, B, and C). The various divisions
of the firm have provided the data given in the following
table on these three possible projects. The company has a
limited capital budget of $2.4 million for the coming year.
a) Which project(s) would the firm undertake if it used the
NPV investment criterion?
b) Is this the correct decision? Why?
Problem 10: The MacBurger Company, a chain of fast-
food restaurants, expects to earn $200 million after taxes
for the current year. The company has a policy of paying
out half of its net after-tax income to the holders of the
company’s 100 million shares of common stock. A share of
common stock of the company current sells for eight times
current earnings. Management and outside analysts
expect the growth rate of earnings and dividends for the
company to be 7.5 percent per year. Calculate the cost of
equity capital to this firm.
Spreadsheet Problem 1: The benefits and costs of an
investment project (the purchase of a piece of machinery)
are those given in the following table. In excel, calculate
the net revenue, or the revenue from the investment minus
the costs; the present value coefficient for every year, and
the present value of the net revenue. Add together column