Problem 1014 Briarcrest Condiments And Spice Making Firm

Problem 1014briarcrest Condiments Is A Spice Making Firm Recently I

Problem 10.14 Briarcrest Condiments is a spice-making firm. Recently, it developed a new process for producing spices. The process requires new machinery that would cost $1,722,000. It has a life of five years and would produce the cash flows shown in the following table:

| Year | Cash Flow |

|-------|------------|

| 1 | $557,385 |

| 2 | ... |

| 3 | ... |

| 4 | ... |

| 5 | ... |

What is the NPV if the discount rate is 16.06 percent? (Enter negative amounts using negative sign e.g., -45.25. Round answer to 2 decimal places, e.g., 15.25.)

Problem 11.24 Bell Mountain Vineyards is considering updating its current manual accounting system with a high-end electronic system. The opportunity cost of capital is 16.9 percent. The costs and values of investments made at different times are as follows:

| Year | Cost | Value of Future Savings (at time of purchase) |

|-------|--------|----------------------------------------------|

| 0 | $5,000 | $7,600 |

| 1 | ... | ... |

| 2 | ... | ... |

| 3 | ... | ... |

| 4 | ... | ... |

| 5 | ... | ... |

| 6 | ... | ... |

Calculate the NPV of each choice. (Round answers to the nearest whole dollar, e.g., 5,275.)

The NPVs are: NPV 0 = $ ____ .

Problem 12.24 Chip’s Home Brew Whiskey management forecasts that if the firm sells each bottle of Snake-Bite for $20, then the demand for the product will be 15,000 bottles per year. If the price is raised by 13 percent, sales will be 93 percent of this demand. The variable cost per bottle is $10, and the total fixed cash cost is $100,000 annually. Depreciation and amortization are $20,000, and the firm has a 30% marginal tax rate. Management anticipates an increased working capital need of $3,000 for the year. What will be the effect of the price increase on the firm’s Free Cash Flow (FCF) for the year? (Round answers to the nearest whole dollar, e.g., 5,275.)

At $20 per bottle, Chip’s FCF is $ ____ .

At the new price, Chip’s FCF is $ ____ .

Problem 13.11 Capital Co. has a capital structure, based on current market values, of 25% debt, 8% preferred stock, and 67% common stock. If the returns required by investors are 10%, 11%, and 19% respectively for debt, preferred stock, and common stock, and the marginal tax rate is 40%, what is Capital’s after-tax WACC? (Round intermediate calculations to 4 decimal places, final answer to 2 decimal places.)

After-tax WACC = ____ %.

Paper For Above instruction

Capital budgeting and financial analysis are fundamental to assessing investment opportunities and ensuring optimal capital structure decisions for firms. This paper explores the calculation of Net Present Value (NPV), Weighted Average Cost of Capital (WACC), and Free Cash Flow (FCF) through practical examples that illustrate these concepts’ application in real-world scenarios. The insights gained highlight how managerial decisions can influence a company's value and strategic direction.

Estimating NPV for Briarcrest Condiments’ New Machinery

The NPV calculation involves discounting future cash flows to their present value and subtracting the initial investment. For Briarcrest Condiments, the initial machinery cost is $1,722,000, with cash flows projected over five years. Using a discount rate of 16.06%, the present value of cash flows is computed as the sum of each year's cash flow discounted at this rate. The formula for NPV is:

NPV = (Sum of present values of cash flows) - Initial Investment

Calculations involve applying the present value factor for each year, which is derived from the discount rate. For example, Year 1 cash flow's present value is $557,385 divided by (1 + 0.1606)^1. Repeating this for all years and summing provides the total present value of cash inflows. Subtracting the initial cost yields the project's NPV, which assists in investment decision-making.

Evaluating Investment Choices for Bell Mountain Vineyards

Each investment option's NPV is calculated similarly, considering the initial cost and the present value of future savings. The opportunity cost of capital at 16.9% is used as the discount rate. For each decision, the present value of future savings is discounted to the purchase year, then compared with the initial cost to determine the NPV. This helps prioritize investments that maximize value creation.

Impact of Price Change on Chip’s FCF

Analyzing the effect of pricing on FCF involves calculating sales volume, revenue, variable costs, and fixed costs. Initially, at $20 per bottle, demand is 15,000 bottles. A price hike of 13% increases the price to $22.60, reducing demand to 93% of original, or approximately 13,950 bottles.

FCF calculation incorporates taxable income derived from revenues minus costs, adjusted for depreciation and working capital changes. The increase in price enhances revenue and FCF despite the demand decline, illustrating the delicate balance between pricing and profitability. Proper tax considerations and working capital requirements are critical in this assessment.

Calculating WACC for Capital Co.

The firm's WACC reflects the minimum return required by all capital providers, adjusted for tax savings due to debt. Using the components' weights—debt (25%), preferred stock (8%), and common stock (67%)—and their respective costs, the pre-tax WACC is calculated. Subsequently, the after-tax WACC accounts for the tax shield on debt, computed as:

WACC = (wd rd (1 - Tc)) + (wp rp) + (we re)

This metric aids in project valuation and capital structure decisions by providing a firm-wide required rate of return.

Conclusion

Practical application of these financial evaluation techniques supports sound managerial decisions, enhances shareholder value, and ensures strategic alignment. Accurate NPV, FCF, and WACC calculations form the backbone of effective capital budgeting and corporate financial management.

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