Model
1

Delicious Snacks, Inc. is considering adding a new line of candies to
its current product line. The company already paid $300K for a marketing
research that provided evidence about the convenience of this product at this
time. The new line will require an additional investment of $70K in raw
materials to produce the candies. The project’s life is 7 years and the firm
estimates selling 1.5M packages at a price of $1 per unit the first year; but
this volume is expected to grow at 17% the next two years, then at 12% for the
following two years, and finally at 7% for the last two years of the project.
The price per unit is expected to grow at the historical average rate of
inflation of 3%. The variable costs will amount 70% of sales and the fixed
costs will be $500K. The equipment required to produce the candies will cost
$750K, and will require an additional $30K to have it delivered and installed.
This equipment has an expected useful life of 7 years and it will be
depreciated using the MACRS 5-year class life. After seven years the equipment
can be sold at a price of $200K. The firm plans financing the new equipment
with 30K semiannual coupon bonds that mature in 30 years, with $1,000 face value,
5% coupon rate, and 12% yield to maturity. The cost of capital is 12% and the firm’s marginal tax rate
is 40%.

Determine the payback period, discounted payback
period, NPV, PI, IRR, and MIRR of the new line of candies. Should the firm
accept or reject the project?

The Claustrophobic Solution, Inc., a residential
window and door manufacturer, has the following historical record of earnings
per share (EPS) from 2011 to 2007:

The
company’s payout ratio has been 60% over the last five years and the last
quoted price of the firm’s share of stock was $10. Flotation costs for new
equity will be 7%. The company has 30,000,000 of
common shares of stock outstanding and a debt-equity ratio of 0.5. If dividends are expected to grow at
the same arithmetic average growth rate of the last five years, what is the
dividend payment in 2012?