Internal Rate of Return Follow the format shown in Exhibit 14B-1 and Exhibit 14B

Question

Internal Rate of Return

Follow the format shown in Exhibit 14B-1 and Exhibit 14B-2 as you complete the requirements below.

Each of the following scenarios is independent. Assume that all cash flows are after-tax cash flows.

Cuenca Company is considering the purchase of new equipment that will speed up the process for producing flash drives. The equipment will cost $7,200,000 and have a life of 5 years with no expected salvage value. The expected cash flows associated with the project follow:

Kathy Shorts is evaluating an investment in an information system that will save $240,000 per year. She estimates that the system will last 10 years. The system will cost $1,248,000. Her company's cost of capital is 10%.

Elmo Enterprises just announced that a new plant would be built in Helper, Utah. Elmo told its stockholders that the plant has an expected life of 15 years and an expected IRR equal to 25%. The cost of building the plant is expected to be $2,880,000.

Required:

1. Calculate the IRR for Cuenca Company. The company's cost of capital is 16%. Round your answer to the nearest percent.
%

Should the new equipment be purchased?
No

2. Calculate Kathy Short's IRR. Round your answer to the nearest percent.
%

Should she acquire the new system?
Yes

3. What should be Elmo Enterprises' expected annual cash flow from the plant? Round your answer to the nearest dollar.
$

Year Cash Revenues Cash Expenses 1 $8,000,000 $6,000,000 2   8,000,000   6,000,000 3   8,000,000   6,000,000 4   8,000,000   6,000,000 5   8,000,000   6,000,000 Exhibit 148.1 Exhibit 14B-1 Present Value of a Single Amount* 196 2% 3% 4% 5% 5% 7% 3% 9% 10% 12% 14% 16% 18% 20% 25% 30% 0.99010 0.98039 0.97087 0.96154 0.95238 0.94340 0.93458 0.92593 0.91743 0.90909 0.89286 0.87719 0.86207 0.84746 0.83333 0.80000 0.76923 2 0.98030 0.96117 0.94260 0.92456 0.90703 0.89000 0.87344 0.85734 0.84168 0.82645 0.79719 0.76947 0.74316 0.71818 0.69444 0.64000 0.59172 3 0.97059 0.94232 0.91514 0.88900 0.86384 0.83962 0.81630 0.79383 0.77218 0.75131 0.71178 0.67497 0.64066 0.60863 0.57870 0.51200 0.45517 4 0.96098 0.92385 0.88849 0.85480 0.82270 0.79209 0.76290 0.73503 0.70843 0.68301 0.63552 0.59208 0.55229 0.51579 0.48225 0.40960 0.35013 5 0.95147 0.90573 0.86261 0.82193 0.78353 0.74726 0.71299 0.68058 0.64993 0.62092 0.56743 0.51937 0.47611 0.43711 0.40188 0.32768 0.26933 6 0.94205 0.88797 0.83748 0.79031 0.74622 0.70496 0.66634 0.63017 0.59627 0.56447 0.50663 0.45559 0.41044 0.37043 0.33490 0.262140.20718 7 0.93272 0.87056 0.81309 0.75992 0.71068 0.66506 0.62275 0.58349 0.54703 0.51316 0.45235 0.39964 0.35383 0.31393 0.27908 0.20972 0.15937 0.12259 9 0.91434 0.83676 0.76642 0.70259 0.64461 0.59190 0.54393 0.50025 0.46043 0.42410 0.36061 0.30751 0.26295 0.22546 0.19381 0.13422 0.09430 10 0.90529 0.82035 0.74409 0.67556 0.61391 0.55839 0.50835 0.46319 0.42241 0.38554 0.32197 0.26974 0.22668 0.19106 0.16151 0.10737 0.07254 0.89632 0.80426 0.72242 0.64958 0.58468 0.52679 0.47509 0.42888 0.38753 0.35049 0.28748 0.23662 0.19542 0.16192 0.13459 0.08590 0.05580 12 0.88745 0.78849 0.70138 0.62460 0.55684 0.49697 0.44401 0.39711 0.35553 0.31863 0.25668 0.20756 0.16846 0.13722 0.11216 0.06872 0.04292 13 0.87866 0.77303 0.68095 0.60057 0.53032 0.46884 0.41496 0.36770 0.32618 0.28966 0.22917 0.18207 0.14523 0.11629 0.09346 0.05498 0.03302 14 0.86996 0.75788 0.66112 0.57748 0.50507 0.44230 0.38782 0.34046 0.29925 0.26333 0.20462 0.15971 0.12520 0.09855 0.07789 0.04398 0.02540 15 0.86135 0.74301 0.64186 0.55526 0.48102 0.41727 0.36245 0.31524 0.27454 0.23939 0.18270 0.14010 0.10793 0.08352 0.06491 0.03518 0.01954 16 0.85282 0.72845 0.62317 0.53391 0.45811 0.39365 0.33873 0.29189 0.25187 0.21763 0.16312 0.12289 0.09304 0.07078 0.05409 0.02815 0.01503 17 0.84438 0.71416 0.60502 0.51337 0.43630 0.37136 0.31657 0.27027 0.23107 0.19784 0.14564 0.10780 0.08021 0.05998 0.04507 0.02252 0.01156 18 0.83602 0.70016 0.58739 0.49363 0.41552 0.35034 0.29586 0.25025 0.21199 0.17986 0.13004 0.09456 0.06914 0.05083 0.03756 0.01801 0.00889 19 0.82774 0.68643 0.57029 0.47464 0.39573 0.33051 0.27651 0.23171 0.19449 0.16351 0.11611 0.08295 0.05961 0.04308 0.03130 0.01441 0.00684 20 0.81954 0.67297 0.55368 0.45639 0.37689 0.31180 0.25842 0.21455 0.17843 0.14864 0.10367 0.07276 0.05139 0.03651 0.02608 0.01153 0.00526 0.81143 0.65978 0.53755 0.43883 0.35894 0.29416 0.24151 0.19866 0.16370 0.13513 0.09256 0.06383 0.04430 0.03094 0.02174 0.00922 0.00405 8 0.92348 0.85349 0.78941 0.73069 0.67684 0.62741 0.58201 0.54027 0.50187 0.46651 0.40388 0.35056 0.30503 0.26604 0.23257 0.167 77 21 22 0.80340 0.64684 0.52189 0.42196 0.34185 0.27751 0.22571 0.18394 0.15018 0.12285 0.08264 0.05599 0.03819 0.02622 0.01811 0.00738 0.0031 23 0.79544 0.63416 0.50669 0.40573 0.32557 0.26180 0.21095 0.17032 0.13778 0.11168 0.07379 0.04911 0.03292 0.02222 0.01509 0.00590 0.00239 24 0.78757 0.62172 0.49193 0.39012 0.31007 0.24698 0.19715 0.15770 0.12640 0.10153 0.06588 0.04308 0.02838 0.01883 0.01258 0.00472 0.00184 25 0.779770.60953 0.47761 0.37512 0.29530 0.23300 0.18425 0.14602 0.11597 0.09230 0.05882 0.03779 0.02447 0.01596 0.01048 0.00378 0.00142 26 0.77205 0.59758 0.46369 0.36069 0.28124 0.21981 0.17220 0.13520 0.10639 0.08391 0.05252 0.03315 0.02109 0.01352 0.00874 0.00302 0.00109 27 0.76440 0.58586 0.45019 0.34682 0.26785 0.20737 0.16093 0.12519 0.09761 0.07628 0.04689 0.02908 0.01818 0.01146 0.00728 0.00242 0.00084 28 0.75684 0.57437 0.43708 0.33348 0.25509 0.19563 0.15040 0.11591 0.08955 0.06934 0.04187 0.02551 0.01567 0.00971 0.00607 0.00193 0.00065 29 0.749340.56311 0.42435 0.32065 0.24295 0.18456 0.14056 0.10733 0.08215 0.06304 0.03738 0.02237 0.01351 0.00823 0.00506 0.00155 0.00050 30 0.74192 0.55207 0.41199 0.30832 0.23138 0.17411 0.13137 0.09938 0.07537 0.05731 0.03338 0.01963 0.01165 0.00697 0.00421 0.00124 0.00038

Explanation / Answer

answer to 3

by using excel function bt the following command

=PMT(25%,15,2880000,0,0) = 746256.6 per year

answer to 1 Year Cash Revenues Cash Expenses cash flow dep cash flow after tax before depreciation present value @16% present value of cash flow 1 $8,000,000 $6,000,000 $2,000,000 1440000 $3,440,000 0.862069 $2,965,517.24 2   8,000,000   6,000,000 2000000 1440000 $3,440,000 0.743163 $2,556,480.38 3   8,000,000   6,000,000 2000000 1440000 $3,440,000 0.640658 $2,203,862.40 4   8,000,000   6,000,000 2000000 1440000 $3,440,000 0.552291 $1,899,881.38 5   8,000,000   6,000,000 2000000 1440000 $3,440,000 0.476113 $1,637,828.77 sum of present value of cash flow $11,263,570.17 cash outflow 7200000 NPV $4,063,570.17 cash flow after tax before depreciation Present value @50% present value of cash flow 3440000 0.666667 $2,293,333.33 3440000 0.444444 $1,528,888.89 3440000 0.296296 $1,019,259.26 3440000 0.197531 $679,506.17 3440000 0.131687 $453,004.12 sum of present value of cash flow $5,973,991.77 cash outflow 7200000 NPV ($1,226,008.23) IRR lower rate + (lower rate npv / lower rate npv - higher rate npv)* difference in rates Lower rate (lower rate npv / lower rate npv - higher rate npv) difference in rate 16 $0.77 34 42.12 percent yes project should be accepted cash outflow 1248000 year savings dep cash flow after tax before depreciation present value@30% present value of cash flow 1 240000 124800 364800 0.9090909 331636.364 2 240000 124800 364800 0.8264463 301487.603 3 240000 124800 364800 0.7513148 274079.639 4 240000 124800 364800 0.6830135 249163.309 5 240000 124800 364800 0.6209213 226512.099 6 240000 124800 364800 0.5644739 205920.09 7 240000 124800 364800 0.5131581 187200.082 8 240000 124800 364800 0.4665074 170181.892 9 240000 124800 364800 0.4240976 154710.811 10 240000 124800 364800 0.3855433 140646.192 sum of present value of cash flow 2241538.08 cash outflow 1248000 NPV 993538.08 cash flow after tax before depreciation present value@30% present value of cash flow 364800 0.7692308 280615.385 364800 0.591716 215857.988 364800 0.4551661 166044.606 364800 0.3501278 127726.62 364800 0.2693291 98251.2463 364800 0.2071762 75577.8818 364800 0.1593663 58136.8321 364800 0.1225895 44720.6401 364800 0.0942996 34400.4924 364800 0.0725382 26461.9172 sum of present value of cash flow 1127793.61 cash outflow 1248000 NPV -120206.39 IRR lower rate + (lower rate npv / lower rate npv - higher rate npv)* difference in rates Lower rate (lower rate npv / lower rate npv - higher rate npv) difference in rate 10 $0.89 20 27.84 percent yes project should be accepted

Related Questions

Navigate

• Browse (All)
• Browse I
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.