Bell Mountain Vineyards is considering updating its current manual accounting sy

Question

Bell Mountain Vineyards is considering updating its current manual accounting system with a high-end electronic system. While the new accounting system would save the company money, the cost of the system continues to decline. The Bell Mountain%u2019s opportunity cost of capital is 14.6 percent, and the costs and values of investments made at different times in the future are as follows:

The NPV of each choice is:

Suggest when should Bell Mountain buy the new accounting system?

Year Cost Value of Future Savings
(at time of purchase) 0 $5,000 $7,000 1 4,150 7,000 2 3,300 7,000 3 2,450 7,000 4 1,600 7,000 5 750 7,000 Bell Mountain Vineyards is considering updating its current manual accounting system with a high-end electronic system. While the new accounting system would save the company money, the cost of the system continues to decline. The Bell Mountain%u2019s opportunity cost of capital is 14.6 percent, and the costs and values of investments made at different times in the future are as follows: Calculate the NPV of each choice. Suggest when should Bell Mountain buy the new accounting system? Chip%u2019s 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, whereas sales will be 85 percent as high if the price is raised 9 percent. Chip%u2019s variable cost per bottle is $10, and the total fixed cash cost for the year is $100,000. Depreciation and amortization charges are $20,000, and the firm has a 30 percent 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%u2019s FCF for the year? Capital Co. has a capital structure, based on current market values, that consists of 28 percent debt, 14 percent preferred stock, and 58 percent common stock. If the returns required by investors are 11 percent, 12 percent, and 18 percent for the debt, preferred stock, and common stock, respectively, what is Capital%u2019s after-tax WACC? Assume that the firm%u2019s marginal tax rate is 40 percent.

Explanation / Answer

1)

Year 0: savings = $2000. NPV = $2000

Year 1: savings = 7000-4150 = 2850. NPV = 2850/1.146 = 2485

Year 2: savings = 7000-3300 = 3700. NPV = 3700/1.146^2 = 2817

Year 3: savings = 7000-2450 = 4550. NPV = 4550/1.146^3 = 3023

Year 4: savings = 7000-1600 = 5400. NPV = 5400/1.146^4 = 3131

Year 5: savings = 7000-700 = 5000. NPV = 5000/1.146^5 = 3187

Bell Mountain should purchase the system in Year 5 since NPV is high

3)

After Tax WACC = 28%*11%*(1-40%) + 14%*12% + 58%*18% = 13.97%

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