Delta Corp bonds have a remaining maturity of 10 years, and they pay interest semiannually. They are selling for $1108 for every $1000 of face value. They carry a fixed coupon rate of 8%. If Delta issues new debt, it will attempt to issue bonds with a maturity of 10 years.
Delta faces a marginal tax rate of 30%.
Delta Corp has 5% perpetual preferred stock with a par value of $50 per share (the firm pays a fixed dividend of $2.50 per share in perpetuity). Each share of this preferred is currently selling for $32.
Delta Corp common stock is currently selling for $54 per share. The company just paid out a per-share dividend of $5.20 for the year ended. Analysts expect the company’s common stock dividends per share to grow at 3% for the foreseeable future.
Delta Corp management expects to raise any new funds for proposed projects in the following manner: 50% debt (using 10-year fixed coupon bonds), 10% preferred equity (using perpetual preferred stock), and the remainder using common equity.
Delta Corp is evaluating a machine for possible purchase. The machine is priced at $400,000. An additional $20,000 will be required for shipping and installation if purchased. Also, the new machine will require an initial investment in net working capital of $30,000. The machine will need to be depreciated on a 6-year schedule, with equal annual amounts taken as depreciation. However, Delta Corp expects to use the machine only for 4 years and then sell it for an expected $230,000.
During each of the 4 years that Delta Corp employs the machine, the company’s sales revenue is expected to be higher by $125,000. Additional annual operating costs (other than depreciation) are expected to total $20,000.

1.) What are the expected operating cash flows for years 1, 2, and 3?

A. $91,000

B. $105,000

C. $24,500

D. $94,500

E. $115,500

2.) What is the machine's expected book value at the end of 4 years?

A. $140,000

B. $0

C. $75,000

D. $70,000

E. $105,000

3.) What is the amount of “terminal cash flow” (i.e., year 4 cash flow)?

A. $230,000

B. $91,000

C. $327,500

D. $94,500

E. $105,000

4.) What is the IRR of the project?

A. 9.11%

B. 8.23%

C. 8.54%

D. 10.72%

E. 7.27%

5.) What is the present value of future cash flows for the proposed project?

A. $327,500

B. $450,000

C. $161,000

D. $481,232.55

E. $611,000

6.) What is the proposed project's net present value (NPV)?

A. $611,000

B. $161,000

C. -$122,500

D. $31,232.55

E. $481,232.55

7.) The machine should be ___________ because its NPV is _________, and its IRR is _______

A. Rejected; Positive; Greater than the WACC

B. Rejected; Greater than the WACC; Greater than the NPV

C. Accepted; Positive; Greater than the WACC

D. Accepted; Positive; Lower than the WACC