What is the initial investment outlay?

Assignment 5

Intermediate Problems 8–18 (10-8).

NPVs, IRRs, and MIRRs for Independent Projects Edelman Engineering is considering including two pieces of equipment, a truck and an overhead pulley system, in this year’s capital budget. The projects are independent. The cash outlay for the truck is $17,100 and that for the pulley system is $22,430. The firm’s cost of capital is 14%. After-tax cash flows, including depreciation, are as follows: Year Truck Pulley 1 $5,100 $7,500 2 5,100 7,500 3 5,100 7,500 4 5,100 7,500 5 5,100 7,500 Calculate the IRR, the NPV, and the MIRR for each project, and indicate the correct accept–reject decision for each.

(10-9). NPVs and IRRs for Mutually Exclusive Projects Davis Industries must choose between a gas-powered and an electric-powered forklift truck for moving materials in its factory. Because both forklifts perform the same function, the firm will choose only one. (They are mutually exclusive investments.) The electric-powered truck will cost more, but it will be less expensive to operate; it will cost $22,000, whereas the gas-powered truck will cost $17,500. The cost of capital that applies to both investments is 12%. The life for both types of truck is estimated to be 6 years, during which time the net cash flows for the electric-powered truck will be $6,290 per year and those for the gas-powered truck will be $5,000 per year. Annual net cash flows include depreciation expenses. Calculate the NPV and IRR for each type of truck, and decide which to recommend.

(10-10). Capital Budgeting Methods Project S has a cost of $10,000 and is expected to produce benefits (cash flows) of $3,000 per year for 5 years. Project L costs $25,000 and is expected to produce cash flows of $7,400 per year for 5 years. Calculate the two projects’ NPVs, IRRs, MIRRs, and PIs, assuming a cost of capital of 12%. Which project would be selected, assuming they are mutually exclusive, using each ranking method? Which should actually be selected?

11-1). Investment Outlay Talbot Industries is considering launching a new product. The new manufacturing equipment will cost $17 million, and production and sales will require an initial $5 million investment in net operating working capital. The company’s tax rate is 40%.

a-What is the initial investment outlay?

b-The company spent and expensed $150,000 on research related to the new product last year. Would this change your answer? Explain.

c-Rather than build a new manufacturing facility, the company plans to install the equipment in a building it owns but is not now using. The building could be sold for $1.5 million after taxes and real estate commissions. How would this affect your answer?

(11-2). Operating Cash Flow The financial staff of Cairn Communications has identified the following information for the first year of the roll-out of its new proposed service:

Projected sales $18million
Operating cost(not including cash flow) $9 million
Depreciation $4million
Interest Expense $3million

Projected sales $18 million Operating costs (not including depreciation) $ 9 million Depreciation $ 4 million Interest expense $ 3 million

The company faces a 40% tax rate. What is the project’s operating cash flow for the first year (t=1)(t=1)?

Assignment 5

Intermediate Problems 8

18 (10

8).

NPVs, IRRs,

and MIRRs for Independent Projects Edelman Engineering is considering including

two pieces of equipment, a truck and an overhead pulley system, in this year’s capital budget.

The projects are independent. The cash outlay for the truck is $17,100 and that f

or the pulley

system is $22,430. The firm’s cost of capital is 14%. After

tax cash flows, including

depreciation, are as follows: Year Truck Pulley 1 $5,100 $7,500 2 5,100 7,500 3 5,100 7,500 4

5,100 7,500 5 5,100 7,500 Calculate the IRR, the NPV, and the

MIRR for each project, and

indicate the correct accept

reject decision for each.

(10

9). NPVs and IRRs for Mutually Exclusive Projects Davis Industries must choose between a

gas

powered and an electric

powered forklift truck for moving materials in its fac

tory. Because

both forklifts perform the same function, the firm will choose only one. (They are mutually

exclusive investments.) The electric

powered truck will cost more, but it will be less expensive

to operate; it will cost $22,000, whereas the gas

pow

ered truck will cost $17,500. The cost of

capital that applies to both investments is 12%. The life for both types of truck is estimated to be

6 years, during which time the net cash flows for the electric

powered truck will be $6,290 per

year and those fo

r the gas

powered truck will be $5,000 per year. Annual net cash flows include

depreciation expenses. Calculate the NPV and IRR for each type of truck, and decide which to

recommend.

(10

10). Capital Budgeting Methods Project S has a cost of $10,000 and is

expected to produce

benefits (cash flows) of $3,000 per year for 5 years. Project L costs $25,000 and is expected to

produce cash flows of $7,400 per year for 5 years. Calculate the two projects’ NPVs, IRRs,

MIRRs, and PIs, assuming a cost of capital of 1

2%. Which project would be selected, assuming

they are mutually exclusive, using each ranking method? Which should actually be selected?

11

1). Investment Outlay Talbot Industries is considering launching

a new product. The new

manufacturing equipment will cost $17 million, and production and sales will require an initial

$5 million investment in net operating working capital. The company’s tax rate is 40%.

a

What is the initial investment outlay?

b

The compan

y spent and expensed $150,000 on research related to the new product last year.

Would this change your answer? Explain.

c

Rather than build a new manufacturing facility, the company plans to install the equipment in a

building it owns but is not now using. T

he building could be sold for $1.5 million after taxes and

real estate commissions. How would this affect your answer?

Assignment 5

Intermediate Problems 8–18 (10-8).

NPVs, IRRs, and MIRRs for Independent Projects Edelman Engineering is considering including

two pieces of equipment, a truck and an overhead pulley system, in this year’s capital budget.

The projects are independent. The cash outlay for the truck is $17,100 and that for the pulley

system is $22,430. The firm’s cost of capital is 14%. After-tax cash flows, including

depreciation, are as follows: Year Truck Pulley 1 $5,100 $7,500 2 5,100 7,500 3 5,100 7,500 4

5,100 7,500 5 5,100 7,500 Calculate the IRR, the NPV, and the MIRR for each project, and

indicate the correct accept–reject decision for each.

(10-9). NPVs and IRRs for Mutually Exclusive Projects Davis Industries must choose between a

gas-powered and an electric-powered forklift truck for moving materials in its factory. Because

both forklifts perform the same function, the firm will choose only one. (They are mutually

exclusive investments.) The electric-powered truck will cost more, but it will be less expensive

to operate; it will cost $22,000, whereas the gas-powered truck will cost $17,500. The cost of

capital that applies to both investments is 12%. The life for both types of truck is estimated to be

6 years, during which time the net cash flows for the electric-powered truck will be $6,290 per

year and those for the gas-powered truck will be $5,000 per year. Annual net cash flows include

depreciation expenses. Calculate the NPV and IRR for each type of truck, and decide which to

recommend.

(10-10). Capital Budgeting Methods Project S has a cost of $10,000 and is expected to produce

benefits (cash flows) of $3,000 per year for 5 years. Project L costs $25,000 and is expected to

produce cash flows of $7,400 per year for 5 years. Calculate the two projects’ NPVs, IRRs,

MIRRs, and PIs, assuming a cost of capital of 12%. Which project would be selected, assuming

they are mutually exclusive, using each ranking method? Which should actually be selected?

11-1). Investment Outlay Talbot Industries is considering launching a new product. The new

manufacturing equipment will cost $17 million, and production and sales will require an initial

$5 million investment in net operating working capital. The company’s tax rate is 40%.

a-What is the initial investment outlay?

b-The company spent and expensed $150,000 on research related to the new product last year.

Would this change your answer? Explain.

c-Rather than build a new manufacturing facility, the company plans to install the equipment in a

building it owns but is not now using. The building could be sold for $1.5 million after taxes and

real estate commissions. How would this affect your answer?

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