Homework 5

Chapter 10:

· Problems (p. 444)

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:

· 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?

Chapter 11:

(11-2). Operating Cash Flow

· The financial staff of Cairn Communications has identified the following information for the first year of the roll-out of its new proposed service:

The company faces a 40% tax rate. What is the project’s operating cash flow for the first year (t=1)(t=1)?

(11-3). Net Salvage Value

· Allen Air Lines must liquidate some equipment that is being replaced. The equipment originally cost $12 million, of which 75% has been depreciated. The used equipment can be sold today for $4 million, and its tax rate is 40%. What is the equipment’s after-tax net salvage value?