Response to the following problem:
The Sopchoppy Motorcycle Company is considering an investment of $600,000 in a new motorcycle. They expect to increase sales in each of the next three years by $400,000, while increasing expenses by $200,000 each year. They expect that they can carve out a niche in the marketplace for this new motorcycle for three years, after which they intend to cease production on this motorcycle. Assume the equipment is depreciated at the rate of $200,000 each year. Sopchoppy's tax rate is 40%.
a. What is the internal rate of return of this project if they sell the manufacturing equipment for $200,000 at the end of three years?
b. What is the internal rate of return of this project if they sell the manufacturing equipment for $100,000 at the end of three years?
c. What is the internal rate of return of this project if they sell the manufacturing equipment for $300,000 at the end of three years?
d. Suppose the following distribution of possible sales prices on the equipment is developed:
|
Sales Price
|
Probability
|
|
$100,000
|
25%
|
|
$200,000
|
50%
|
|
$300,000
|
25%
|
What is the expected internal rate of return for Sopchoppy? What is the standard deviation of these possible internal rates of return?