Question
Internal Rate of Return PLEASE DO 3 Follow the format shown in Exhibit 12B.1 and Exhibit 12B.2 as you complete the requirements below. Each of
Internal Rate of Return
PLEASE DO 3
Follow the format shown in Exhibit 12B.1 and Exhibit 12B.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 $2,880,000.
Required:
1. Calculate the IRR for Cuenca Company. The company's cost of capital is 16%. Round your answer to the nearest percent. 12 % CORRECT
Should the new equipment be purchased?
No CORRECT
2. Calculate Kathy Short's IRR. Round your answer to the nearest percent. 14 % CORRECT
Should she acquire the new system?
Yes CORRECT
3. What should be Elmo Enterprises' expected annual cash flow from the plant? Round your answer to the nearest dollar. ___________________$
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