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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

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

  1. 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
  2. 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%.
  3. 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.

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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

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