Problem 10-08 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 $15,000 and that for the pulley system is $21,000. The firm's cost of capital is 11%. 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

a. Calculate the IRR for each project. Round your answers to two decimal places.

Truck: %

Pulley: %

b. Calculate the NPV for each project. Round your answers to the nearest dollar, if necessary. Enter each answer as a whole number. For example, do not enter 1,000,000 as 1 million.

Truck: $   
Pulley: $   

c. Calculate the MIRR for each project. Round your answers to two decimal places.

Truck:  %
Pulley:  %

Please, show step by step. Thank you.

Suppose you have set a specific goal for the balance in your savings account 12 years from today. You have been making year-end deposits of $2,000 per year for the past 8 years, and this annual deposit (if continued for 12 more years) would have been sufficient to reach your goal under the 10 percent average annual interest rate (annual compounding) that you have been receiving. However you believe that the average annual interest rate on your deposits will be only 9 percent per year compounded annually over the remaining 12 years of the investment period. If your goal remains unchanged, you must adjust your annual deposit to reflect this new interest rate. Assuming that your next deposit will be made one year from today, what must be the amount of each of the remaining 12 deposits in order to reach your original goal?

Derek plans to retire on his 65th birthday. However, he plans to work part-time until he turns 74.00. During these years of part-time work, he will neither make deposits to nor take withdrawals from his retirement account. Exactly one year after the day he turns 74.0 when he fully retires, he will wants to have $3,311,865.00 in his retirement account. He he will make contributions to his retirement account from his 26th birthday to his 65th birthday. To reach his goal, what must the contributions be? Assume a 8.00% interest rate
Answer format: Currency: Round to: 2 decimal places.

A firm will pay a dividend of $1.18 next year. The dividend is expected to grow at a constant rate of 4.93% forever and the required rate of return is 14.67%. What is the value of the stock?

Answer format: Currency: Round to: 2 decimal places.

Today is Derek’s 25th birthday. Derek has been advised that he needs to have $2,103,378.00 in his retirement account the day he turns 65. He estimates his retirement account will pay 4.00% interest. Assume he chooses not to deposit anything today. Rather he chooses to make annual deposits into the retirement account starting on his 28.00th birthday and ending on his 65th birthday. How much must those deposits be?

Answer format: Currency: Round to: 2 decimal places.

I would appreciate the help! :)

Due to a recession, expected inflation this year is only 4.75%. However, the inflation rate in Year 2 and thereafter is expected to be constant at some level above 4.75%. Assume that the expectations theory holds and the real risk-free rate (r*) is 3.5%. If the yield on 3-year Treasury bonds equals the 1-year yield plus 1.0%, what inflation rate is expected after Year 1? Round your answer to two decimal places.

Amazing Manufacturing, Inc., has been considering the purchase of a new manufacturing facility for $500,000. The facility is to be fully depreciated on a straight-line basis over seven years. It is expected to have no resale value at that time. Operating revenues from the facility are expected to be $390,000, in nominal terms, at the end of the first year. The revenues are expected to increase at the inflation rate of 4 percent. Production costs at the end of the first year will be $235,000, in nominal terms, and they are expected to increase at 5 percent per year. The real discount rate is 7 percent. The corporate tax rate is 21 percent. Calculate the NPV of the project. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

NPV

A project has an initial cost of $65,475, expected net cash inflows of $12,000 per year for 11 years, and a cost of capital of 10%. What is the project's NPV? (Hint: Begin by constructing a time line.) Do not round your intermediate calculations. Round your answer to the nearest cent.

Consider the case of Falcon Freight Inc. (FF):

Five years of realized returns for FF are given in the following table. Remember:

Given the preceding data, the average realized return on FF’s stock is   ._________-

The preceding data series represents ________ of FF’s historical returns. Based on this conclusion, the standard deviation of FF’s historical returns is   ._____________

If investors expect the average realized return from 2012 to 2016 on FF’s stock to continue into the future, its coefficient of variation (CV) will be __________________

The Casper Ice Cream Company is an ice cream manufacturer in Richmond, Utah famous for making Fat Boy Ice Cream Sandwiches. The owner, Mr. Casper, the grandson of the founder, is considering replacing an existing ice cream maker and batch freezer with a new maker which has a greater output capacity and operates with less labor. His only alternative is to overhaul his ice cream maker and batch freezer which have a current net book value of $6,000 and three years of remaining depreciable life (straight line). The equipment would cost $10,000 to overhaul but this would increase its useful life for 10 years which is also the life of the new machinery. Mr. Casper’s accountant tells him the new net book value of the overhauled equipment could be depreciated straight line over four years. The old machinery has zero salvage value currently.

The new maker and freezer would cost $50,000 including installation. It would be fully depreciated over 10 years and would have $3,000 salvage at the end of that period. Because of automatic features, the new equipment would allow labor saving of $9,000 per year.

Even though the new equipment has increase capacity, Mr. Casper does not feel any extra product could be sold until year five. At that time, he estimates that additional sales would result in additional net cash revenues before tax of $5,000 per year for the remaining life of the machine. By the end of year four, however, working capital would have to be increased by $3,000 to support the higher sales. This increase in working capital will be recovered at the end of the project, which will last for 10 years.   

Casper Company is currently in the 30% tax bracket. Mr. Casper demands a rate of return of 16%.   

Complete a NPV and IRR analysis on the project.

Stock quotes

Smith Enterprises recently was profiled on a financial information website and touted as a "hot" growth stock. You acquired the stock quote shown here from that website.

The last trade time is shown to be at 4:00 PM Eastern Time. The abbreviation “ttm” stands for “trailing twelve months,” and the number shown reflects data from the previous 12 months. The abbreviation “3m” reflects data from the previous 3 months.

What exchange does Smith Enterprises trade on?

NYSE

FTSE

NASDAQ

AMEX

SME

What is Smith’s earnings per share (EPS) for the trailing 12 months?

$1.97

$2.24

$1.75

$2.03

$1.67

How much did the price increase today over yesterday’s closing price?

$5.22

$5.29

$5.08

$5.15

$5.36

How heavy was the trading of Smith’s stock today relative to the normal level of trading?

Relatively light trading

Average trading

Relatively heavy trading

Calculate the annualized cost of the trade credit terms of 3​/15 net 75 when payment is made on the net due date​ (assume a​ 365-day year).

The annualized cost of the trade credit terms is ___% (round to 2 decimal places)

This case continues following the new project of the WePPROMOTE Company, that you and your partner own. WePROMOTE is in the promotional materials business. The project being considered is to manufacture a unique case for smartphones. The case is very durable, attractive and fits virtually all models of smartphone. It will also have the logo of your client, a prominent, local company and is planned to be given away at public relations events by your client.

As we know from prior cases involving this company, more and more details of the project become apparent and with more precision and certainty.

The following are the final values to the data that you have been estimating up to this point:

- You can borrow funds from your bank at 3%.

- The cost to install the needed equipment will be $105,000 and this cost is incurred prior to any cash is received by the project.

- The gross revenues from the project will be $25,000 for year 1, then $27,000 for years 2 and 3. Year 4 will be $28,000 and year 5 (the last year of the project) will be $23,000.

- The expected annual cash outflows (current project costs) are estimated at being $13,000 for the first year, then $12,000 for years 2, 3, and 4. The final year costs will be $10,000.

- Your tax rate is 30% and you plan to depreciate the equipment on a straight-line basis for the life of the equipment.

- After 5 years the equipment will stop working and will have a residual (salvage) value of $5,000).

- The discount rate you are assuming is now 7%.

The Tasks:

1. Perform the final NPV calculations and provide a narrative of how you calculated the computations and why.

2. Then provide a summary conclusion on whether you should continue to pursue this business opportunity.