Fin 326 Ch. 9 Practice Exercise

Q1a) For which of these cash flow series is it necessary to calculate MIRR?

SERIES 1 SERIES 2

CF0 = -1050 CF0 = 1200

CF1 = 450 CF1 = -500

CF2 = 600 CF2 = 700

CF3 = 800 CF3 = -1000

Using a required rate of return of 12%, calculate the MIRR for the series you chose b) Calculate the discounted payback period for the CF series you DIDNT chose in Part A

Q2. Hat Inc. is thinking of investing in a new machine to produce baseball caps. The new machine will cost $1M and will last for 4 years. At the end of 4 years salvage value is estimated at $100k. Executives believe they will be able to generate $750k in sales next year. COGS are estimated to be 35% of sales. Fixed costs for the production are $150K. Sales are projected to grow by 15% each year from years 2-4. Net working capital requirements are as follows: $140K, $170K, $190K, $160K in years 1-4 respectively. Hat Inc. uses straight line depreciation, has a tax rate of 20%, and a required rate of return of 13%.

a) Use Excel to find the NPV and IRR of investing in the new machine. b) Find the Accounting Breakeven Points for COGS%, Fixed Costs, and Sales in Yr 1.