Question

PV PROFILE QUESTION



Canada Sports Inc. is expanding its hockey stick production. Currently they produce goalie

sticks made out of wood only. They want to expand in to new sticks which are 100 percent

composite with foam injected in the shaft and blade. The advantage of the new sticks is that

they are extremely light and have good shock absorption.

To produce the new sticks Canada Sports Inc. needs to purchase specialized machinery to inject

the foam into the new sticks. After discussions with a Finnish producer of goalie sticks, Canada

Sports Inc. is looking at one of two possible machines – a high speed and a low speed injection

process. Each machine is expected to last for 10 years after which Canada Sports Inc. will

replace the machine with the same model.

-Canada Sports Inc. has collected the following information on both machines:

-The after tax, initial investment for the high speed machine is $40,000, and for the low speed

machine is $15,000

-At an interest rate of zero, the sum of the positive cash inflows for the high speed machine is

$75,000.

-At an interest rate of zero, the sum of the positive cash inflows for the low speed machine is $26,000

- The IRR for the high speed machine is 10.61%, and the IRR for the low speed machine is 13.50%

- At an interest rate of 9.587%, the NPV for both projects is $2,537.

1. Over what range of costs of capital should Canada Sports Inc. choose the high speed machine?

2. Over what range of costs of capital should Canada Sports Inc. choose the low speed machine?

3. Over what range of costs of capital should Canada Sports Inc. not invest in either project?

Answer 1

	High speed	Low speed
Initial Inv.	40000	15000
Sum of +ve cash flows	75000	26000
IRR	10.61%	13.50%
ie. NPV at 10.61%	0
NPV at 13.5%		0
NPV at 9.587%	2537	2537
Cost of capital at NPV-IRR(10.61%-9.587%)	1.02%
Cost of capital at NPV-IRR(13.5%-9.587%)		3.91%
The concept is the greater the amount by which the IRR exceeds the cost of capital, the higher the net cash flows to the firm
1.Range of costs of capital Canada Sports Inc. choose the high speed machine
COC > 9.587% &< 10.61%
2.Range of costs of capital Canada Sports Inc. choose the low speed machine
COC >10.61% & <13.5%
3.not invest in either project
COC >13.5%