Internal Rate of Return

Follow the format shown in Exhibit 14B-1 and Exhibit 14B-2 as you complete the requirements below.

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 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

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%.

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%. Round your answer to the nearest percent. %

Should the new equipment be purchased?

2. Calculate Kathy Short's IRR. Round your answer to the nearest percent. %

Should she acquire the new system?

3. What should be Elmo Enterprises' expected annual cash flow from the plant? Round your answer to the nearest dollar. $