1. ABC Inc. is considering the purchase of a new machine with an initial outlay of $4,500 & expected cash

1. ABC Inc. is considering the purchase of a new machine with an initial outlay of $4,500 & expected cash flows in year 1-4 of $2,200 per year. This risk-adjusted discount rate for the firm is 12%, and the risk-free rate is 5%. Compute the net present value of this project.

2. ABC Inc. has $5 million of debt outstanding with a rate of 12%. Currently the yield to maturity on these bonds is 14%. If the company's tax rate is 40%, what is the cost of debt to ABC Inc.?

3. ABC Inc. plans to issue 10-year bonds with a par value of $1,000 that will pay $55 every 6 months. The net amount of capital to the company from the sale of each bond is $840.68. If ABC inc. is in the 25% tax bracket & its before-tax cost of capital is 14%, what is the after-tax cost of debt? SOLUTION