1. Collins Company is considering the purchase of new equipment that will speed up the process for producing hard disk drives. The equipment will cost $1,563,500 and have a life of five years with no expected salvage value. The expected cash flows associated with the project follow:
Year
|
Cash Revenues
|
Cash Expenses
|
|
1
|
$1,500,000
|
$1,000,000
|
|
2
|
1,500,000
|
1,000,000
|
|
3
|
1,500,000
|
1,000,000
|
|
4
|
1,500,000
|
1,000,000
|
|
5
|
1,500,000
|
1,000,000
|
Calculate the IRR. Should the new equipment be purchased?
2. Pamela Barker is evaluating an investment in an information system that will save $100,000 per year. She estimates that the system will last 10 years. The system will cost $521,600. Her company's cost of capital is 10 percent. Calculate the project's internal rate of return. Should she acquire the new system?
3. Somerset Enterprises just announced that a new plant would be built in Wilmington, Delaware. Somerset told its shareholders that the plant has an expected life of 15 years and an expected IRR equal to 24 percent. The cost of building the plant is expected to be $2,400,000. What is the expected annual cash flow from the plant?