Question

Each of the following scenarios is independent. Assume that all cash flows are after-tax cash flows. Cuenca Company is considering the purchase of new equipment that will speed up the process for producing flash drives. The equipment will cost $7,200,000 and have a life of 5 years with no expected salvage value. The expected cash flows associated with the project follow: Year Cash Revenues Cash Expenses 1 $8,000,000 $6,000,000 2 8,000,000 6,000,000 3 8,000,000 6,000,000 4 8,000,000 6,000,000 5 8,000,000 6,000,000 Kathy Shorts is evaluating an investment in an information system that will save $240,000 per year. She estimates that the system will last 10 years. The system will cost $1,248,000. Her company's cost of capital is 10%. Elmo Enterprises just announced that a new plant would be built in Helper, Utah. Elmo told its stockholders that the plant has an expected life of 15 years and an expected IRR equal to 25%. The cost of building the plant is expected to be $2,880,000. Required: 1. Calculate the IRR for Cuenca Company. The company's cost of capital is 16%. Round your answer to the nearest percent

Answer 1

Answer:

1. Calculate the IRR for Cuenca Company. The company's cost of capital is 16%.

• 12%

Explanation:

Cuenca Company

Equipment cost $7,200,000

useful life 5 years, no salvage value

Year       Cash                  Cash                 Net cash flows

              revenues           expenses

0                                       $7,200,000        -$7,200,000

1            $8,000,000        $6,000,000        $2,000,000

2           $8,000,000        $6,000,000        $2,000,000

3           $8,000,000        $6,000,000        $2,000,000

4           $8,000,000        $6,000,000        $2,000,000

5           $8,000,000        $6,000,000        $2,000,000

using a financial calculator, the internal rate of return (IRR) = 12.05% = 12%

Answer 2

The IRR for Cuenca Company is 12%.

The internal rate of return is a capital budgeting method that is used to determine the profitability of a project.  Internal rate of return is the discount rate that equates the after-tax cash flows from an investment to the amount invested.

Cash flows of the project

• Cash flow in year 0 = $-7,200,000
• Cash flow in year 1 = $8,000,000 - $6,000,000 = $2 million
• Cash flow in year 2 = $8,000,000 - $6,000,000 = $2 million
• Cash flow in year 3 = $8,000,000 - $6,000,000 = $2 million

• Cash flow in year 4 = $8,000,000 - $6,000,000 = $2 million

• Cash flow in year 5 = $8,000,000 - $6,000,000 = $2 million

The IRR can be determined using a financial calculator, the IRR is 12%.

To learn more about the internal rate of return, please check: https://brainly.com/question/24172627