Chicago Value Company Case

1129 Words Mar 4th, 2007 5 Pages
1. Explain the inputs into 1) the net initial investment outlay at year 0, the initial investment $200,000 which include taxes and delivery, and the cost to install the equipment $12,500. The total net cost $212,500. 2) The depreciation tax savings in each year of the projects economic life, this will show how much the tax savings will be depreciated each year using the MACRS method 3) the projects incremental cash flows? This shows the company profit for each of the eight years.
Net Cost MACRS Tax Rate Depreciation Tax Savings $ 212,500 0.20 $ 42,500 40% $ 17,000 $ 212,500 0.32 $ 68,000 40% $ 27,200 $ 212,500 0.19 $ 40,375 40% $ 16,150 $ 212,500 0.12 $
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5. What is the project 's MIRR? The project is 13.24% What is the difference between the IRR and MIRR? The IRR is 16.20% Which is better? Why? The between the MIRR and IRR – the IRR for the cash flows for each year are determine from the rate based on the present value. The MIRR the future value based on the initial investment determines the rate. The MIRR is better because have an expected rate of return.
N I Present Value PMT Future Value
0 11 -36000 0 $ 36,000.00
1 11 -36000 0 $ 39,960.00
2 11 -41100 0 $ 50,639.31
3 11 -45350 0 $ 62,022.07
4 11 -46200 0 $ 70,134.85
5 11 -52150 0 $ 87,875.78
6 11 -63200 0 $118,210.20
7 11 -53000 0 $110,036.49 $574,878.70

6. Suppose a potential customer wants to know the projects for profitability index (PI). What is the value of the PIU of Lone Star, and what is the rationale behind this measure? Profitability Index = PI Present Value of Future Cash Flow over Initial Cost = 212500 + 36944 = 249,455 over Initial Cost 212,500 equal 1.173 for every $1 invested in the project, the total value created is 1.173. Therefore the Chicago Valve Company has a net profit of 1.173 – 1=$0.173 per every dollar invested.
7. Under what conditions do NPV, IRR, MIRR and PI all leads to the same accept/reject decision? If the projects are independent accept both. When can conflicts occur? If a conflict arises,
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