FI515 Financial Management: Week 5 Assignment (10-8, 10-9, 11-2, 11-3)

Fi515 Financial Management
Week 5 Homework

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. Since both forklifts perform the same function, the firm will choose only one. These 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 the capital 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 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.

11-2 Operating Cash flow
Cairn Communications is trying to estimate the first-year operating cash flow (at t=1) for a proposed project. The financial staff has collected information:
Projected sales $10 million
Operating costs (not including depreciation) $7 million
Depreciation $2 million
Interest expense $2 million

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

11-3 Net Salvage Value
Allen Air Lines is now in the terminal year of a project. The equipment originally cost $20 million, of which 80% has been depreciated. Carter can sell the used equipment today to another airline for $5 million, and its tax rate is 40%. What is the equipment’s after-tax net salvage value?
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