Question

(NPV & IRR): Trane Air Conditioners is interested in acquiring several competitors in order to grow its businesses in Europe. The purchase price (in millions) is listed at Time 0 and the expected revenue it will generate is listed for the next 8 years. Time Lennox ($10.00) $3.00 $3.00 $3.00 $2.00 $2.00 $2.00 $1.00 $1.00 Carrier$7.00) $2.00 $2.00 $2.00 $1.00 $1.00 $1.00 $0.50 $0.50 Peets ($7.00)$2.00 1.00 $1.00 $1.00 $1.00 $1.00 S0.50 S0.50 0 4 7 8 1. Calculate the NPV and IRR for each of the firms Trane hopes to acquire. Assume WACC 2. If Trane's CFO indicates the purchase must be mutually exclusive, which supplier(s) will 3. If Trane's CFO indicates the purchase must be independent, which supples Trane is 5%. Round your answer to 2 decimal points (for example, $5.55 or 5.55%). Trane buy? Explain your answer in 2-3 sentences. buy?

Answer 1

Lennox

Net present value is solved using a financial calculator. The steps to solve on the financial calculator:

• Press the CF button.
• CF0= -$10.00. It is entered with a negative sign since it is a cash outflow.
• Cash flow for all the years should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow, press the NPV button and enter the weighted average cost of capital of 15%.
• Press the down arrow and CPT buttons to get the net present value.

Net Present value of cash flows at 14% the weighted average cost of capital is $4.26.

Internal rate of return is calculated using a financial calculator by inputting the below:

• Press the CF button.
• CF0= -$17,000,000. It is entered with a negative sign since it is a cash outflow.
• Cash flow for each year should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow cash flow, press the IRR and CPT button to get the IRR of the project.

The IRR of project is 17.02%

Carrier

Net present value is solved using a financial calculator. The steps to solve on the financial calculator:

• Press the CF button.
• CF0= -$10.00. It is entered with a negative sign since it is a cash outflow.
• Cash flow for all the years should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow, press the NPV button and enter the weighted average cost of capital of 15%.
• Press the down arrow and CPT buttons to get the net present value.

Net Present value of cash flows at 14% the weighted average cost of capital is $1.49

Internal rate of return is calculated using a financial calculator by inputting the below:

• Press the CF button.
• CF0= -$17,000,000. It is entered with a negative sign since it is a cash outflow.
• Cash flow for each year should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow cash flow, press the IRR and CPT button to get the IRR of the project.

The IRR of project is 11.69%.

Peets

Net present value is solved using a financial calculator. The steps to solve on the financial calculator:

• Press the CF button.
• CF0= -$10.00. It is entered with a negative sign since it is a cash outflow.
• Cash flow for all the years should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow, press the NPV button and enter the weighted average cost of capital of 15%.
• Press the down arrow and CPT buttons to get the net present value.

Net Present value of cash flows at 14% the weighted average cost of capital is -$0.28

Internal rate of return is calculated using a financial calculator by inputting the below:

• Press the CF button.
• CF0= -$17,000,000. It is entered with a negative sign since it is a cash outflow.
• Cash flow for each year should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow cash flow, press the IRR and CPT button to get the IRR of the project.

The IRR of project is 3.78%.

b.If the purchase is mutually exclusive, Tran must buy Lennox since it has the highest net present value.

c.Tran should purchase Lennox and Carrier if the purchase is independent. All purchase with a positive net present value are selected in case of independent purchase.

In case of any query, kindly comment on the solution