corporate finance

Assignment 5

Intermediate Problems 8

–

18 (10

-

8).

NPVs, IRRs,

and MIRRs for Independent Projects Edelman Engineering is considering including

two pieces of equipment, a truck and an overhead pulley system, in this year’s capital budget.

The projects are independent. The cash outlay for the truck is $17,100 and that f

or the pulley

system is $22,430. The firm’s cost of capital is 14%. After

-

tax cash flows, including

depreciation, are as follows: Year Truck Pulley 1 $5,100 $7,500 2 5,100 7,500 3 5,100 7,500 4

5,100 7,500 5 5,100 7,500 Calculate the IRR, the NPV, and the

MIRR for each project, and

indicate the correct accept

–

reject decision for each.

(10

-

9). NPVs and IRRs for Mutually Exclusive Projects Davis Industries must choose between a

gas

-

powered and an electric

-

powered forklift truck for moving materials in its fac

tory. Because

both forklifts perform the same function, the firm will choose only one. (They are mutually

exclusive investments.) The electric

-

powered truck will cost more, but it will be less expensive

to operate; it will cost $22,000, whereas the gas

-

pow

ered truck will cost $17,500. The cost of

capital that applies to both investments is 12%. The life for both types of truck is estimated to be

6 years, during which time the net cash flows for the electric

-

powered truck will be $6,290 per

year and those fo

r the gas

-

powered truck will be $5,000 per year. Annual net cash flows include

depreciation expenses. Calculate the NPV and IRR for each type of truck, and decide which to

recommend.

(10

-

10). Capital Budgeting Methods Project S has a cost of $10,000 and is

expected to produce

benefits (cash flows) of $3,000 per year for 5 years. Project L costs $25,000 and is expected to

produce cash flows of $7,400 per year for 5 years. Calculate the two projects’ NPVs, IRRs,

MIRRs, and PIs, assuming a cost of capital of 1

2%. Which project would be selected, assuming

they are mutually exclusive, using each ranking method? Which should actually be selected?

11

-

1). Investment Outlay Talbot Industries is considering launching

a new product. The new

manufacturing equipment will cost $17 million, and production and sales will require an initial

$5 million investment in net operating working capital. The company’s tax rate is 40%.

a

-

What is the initial investment outlay?

b

-

The compan

y spent and expensed $150,000 on research related to the new product last year.

Would this change your answer? Explain.

c

-

Rather than build a new manufacturing facility, the company plans to install the equipment in a

building it owns but is not now using. T

he building could be sold for $1.5 million after taxes and

real estate commissions. How would this affect your answer?

Assignment 5

Intermediate Problems 8–18 (10-8).

NPVs, IRRs, and MIRRs for Independent Projects Edelman Engineering is considering including

two pieces of equipment, a truck and an overhead pulley system, in this year’s capital budget.

The projects are independent. The cash outlay for the truck is $17,100 and that for the pulley

system is $22,430. The firm’s cost of capital is 14%. After-tax cash flows, including

depreciation, are as follows: Year Truck Pulley 1 $5,100 $7,500 2 5,100 7,500 3 5,100 7,500 4

5,100 7,500 5 5,100 7,500 Calculate the IRR, the NPV, and the MIRR for each project, and

indicate the correct accept–reject decision for each.

(10-9). NPVs and IRRs for Mutually Exclusive Projects Davis Industries must choose between a

gas-powered and an electric-powered forklift truck for moving materials in its factory. Because

both forklifts perform the same function, the firm will choose only one. (They are mutually

exclusive investments.) The electric-powered truck will cost more, but it will be less expensive

to operate; it will cost $22,000, whereas the gas-powered truck will cost $17,500. The cost of

capital that applies to both investments is 12%. The life for both types of truck is estimated to be

6 years, during which time the net cash flows for the electric-powered truck will be $6,290 per

year and those for the gas-powered truck will be $5,000 per year. Annual net cash flows include

depreciation expenses. Calculate the NPV and IRR for each type of truck, and decide which to

recommend.

(10-10). Capital Budgeting Methods Project S has a cost of $10,000 and is expected to produce

benefits (cash flows) of $3,000 per year for 5 years. Project L costs $25,000 and is expected to

produce cash flows of $7,400 per year for 5 years. Calculate the two projects’ NPVs, IRRs,

MIRRs, and PIs, assuming a cost of capital of 12%. Which project would be selected, assuming

they are mutually exclusive, using each ranking method? Which should actually be selected?

11-1). Investment Outlay Talbot Industries is considering launching a new product. The new

manufacturing equipment will cost $17 million, and production and sales will require an initial

$5 million investment in net operating working capital. The company’s tax rate is 40%.

a-What is the initial investment outlay?

b-The company spent and expensed $150,000 on research related to the new product last year.

Would this change your answer? Explain.

c-Rather than build a new manufacturing facility, the company plans to install the equipment in a

building it owns but is not now using. The building could be sold for $1.5 million after taxes and

real estate commissions. How would this affect your answer?