Question

12-29

Chapter 12 Capital Investment Decisions CTIVE 3 Brief Exercise 12-28 Net Present Value xample 12.3 ed to produce annual revenues of $2.700,000. Producing the printer requires an invest in new equipment costing $2,880,000. The printer has a projected life cycleof5 After 5 years, the equipment can be sold for $360,000. Working capital is also expe Talmage Inc. has just completed development of a new printer. The new product i increase by $360,000, which Talmage will recover by the end of the new product's life cycle Annual cash operating expenses are estimated at $1,620,000. The required rate of re is 8%. Required: 1. Prepare a schedule of the projected annual cash flows. 2. Calculate the NPV using only discount factors from Exhibit 12B.1 (p. 670). 3. Calculate the NPV using discount factors from both Exhibits 12B.1 and 12B.2 (p. 671) TIVE 4Brief Exercise 12-29 Internal Rate of Return mple 12.4 Richins Company produces automobile engine parts. The company is examining the possibility of investing in a new production system that will reduce the costs of the current system. The new system will require a cash investment of $11,551,968 and will produce net cash savings of $1,800,000 per year. The system has a projected life of 10 years. Required: Calculate the IRR for the new production system.

Answer 1

PV factor for Internal rate of return = Cash investment / Net cash savings

PV factor for Internal rate of return = 11551968/1800000= 6.41776

The PV factor 6.41776 for 10 years is closest to 9%

Internal rate of return (IRR) = 9%