3.Suppose a company\'s projected free cash flow for next year is $500 million an

Question

3.Suppose a company's projected free cash flow for next year is $500 million and it is expected to grow at a constant rate of 6 percent. If the company's weighted average cost of capital is 11 percent, what is the current value of operations, to the nearest million? (Hint: Please consider FCF0 vs FCF1.) The Congress Company has identified two methods for producing playing cards. One method involves using a machine having a fixed cost of $10,000 and variable costs of $1.00 per deck of cards. The other method would use a less expensive machine (fixed cost = $5,000), but it would require greater variable costs ($1.50 per deck of cards). If the selling price per deck of cards will be the same under each method, at what level of output will the two methods produce the same net operating income? (Hint: Same net income will be when each output level is equal to the other; ie, when Total CostMethod 1 = Total CostMethod 2.)

Explanation / Answer

the current value of operations is 10,000 million

Total costMethod 1 = $1.00(Q) + $10,000.

Total costMethod 2 = $1.50(Q) + $5,000.

Set equal and solve for Q:

Q + $10,000 = $1.50(Q) + $5,000

$5,000 = $0.5(Q)

10,000 = Q.

the level of output is 10000 decks

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