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

a. Manchester Company is considering the purchase of new equipment that will speed up the process for producing flash drives. The equipment will cost $6,254,000 and have a life of five years with no expected salvage value. The expected cash flows associated with the project follow:

Year Cash Revenues Cash Expenses 1 $6,000,000 $4,000,000 2 6,000,000 4,000,000 3 6,000,000 4,000,000 4 6,000,000 4,000,000 5 6,000,000 4,000,000

b. Kathleen Briggs is evaluating an investment in an information system that will save $160,000 per year. She estimates that the system will last 10 years. The system will cost $834,560. Her company’s cost of capital is 10 percent.

c. Castle Dale Enterprises just announced that a new plant would be built in Price, Utah. Castle Dale told its shareholders that the plant has an expected life of 15 years and an expected IRR equal to 25 percent. The cost of building the plant is expected to be $2,880,000.
Required:
. Calculate the IRR for Manchester Company. The company’s cost of capital is 16 percent. Should the new equipment be purchased?
. Calculate Kathleen Brigg’s IRR. Should she acquire the new system?
. What should be Castle Dale Enterprises’ expected annual cash flow from the plant?
Exercise