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Category > Accounting Posted 19 Aug 2017 My Price 10.00

Cuenca Company

Exercise 14-29  Internal Rate of Return

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

a.       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:

 

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

b.       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%.

c.        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%. Should the new equipment be purchased?

2.       Calculate Kathy Short’s IRR. Should she acquire the new system?

3.       What should be Elmo Enterprises’ expected annual cash flow from the plant?

Answers

Maurice Tutor
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Status NEW Posted 19 Aug 2017 03:08 PM My Price 10.00

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