As soon as possible . Thank you A group of farmers in Inverness is considering building an irrigation system from a water supply in some nearby mountains. They want to build a concrete reservoir with a steel pipe system. The first cost would be $230,000 with (current) annual maintenance costs of $2500. They expect the irrigation system will bring them$25,500 per year in additional (current) revenues due to better crop production. Their real dollar MARR is 3 percent, and they anticipate inflation to be 2 percent per year. Assume the reservoir will have a 20-year life.a. Using the current cash flows, find the current IRR on this project. Use linear interpolation with x, = 7% and x, = 8% to find your answer.The current IRR of this project is percent.(Round the final answer to two decimal places as needed. Round all intermediate values to six decimal places as needed.)b. What is the current MARR?The current MARR is percent.(Round the final answer to two decimal places as needed. Round all intermediate values to six decimal places as needed.)c. Should they invest?O A. Yes, they should invest, as the current rate of return exceeds the MARR.O B. No, they should not invest, as the irrigation system is an extraneous purchase.O C. No, they should not invest, as the project's first cost is too high.O D. No, they should not invest, as the current rate of return exceeds the MARR.

IRR is the internal rate of return at present value of cash flow is equivalent to initial cost of…

the current cash flows, find the current IRR on this project. Use linear interpolation with x, = 7% and x, 8% to find your answer. ent IRR of this project is O percent he final answer to two decimal places as needed. Round all intermediate values to six decimal places as needed.) is the current MARR? ant MARR is O percent he final answer to two decimal places as needed. Round al intermediate values to six decimal places as needed) s they invest? es, they should invest, as the current rate of retum exceeds the MARR. o, they should not invest, as the irrigation system is an extraneous purchase. 1o, they should not invest, as the project's first cost is too high. to, they should not invest, as the current rate of return exceeds the MARR.

the current cash flows, find the current IRR on this project. Use linear interpolation with x, = 7% and x, 8% to find your answer. ent IRR of this project is O percent he final answer to two decimal places as needed. Round all intermediate values to six decimal places as needed.) is the current MARR? ant MARR is O percent he final answer to two decimal places as needed. Round al intermediate values to six decimal places as needed) s they invest? es, they should invest, as the current rate of retum exceeds the MARR. o, they should not invest, as the irrigation system is an extraneous purchase. 1o, they should not invest, as the project's first cost is too high. to, they should not invest, as the current rate of return exceeds the MARR.

Financial Management: Theory & Practice

16th Edition

ISBN:9781337909730

Author:Brigham

Publisher:Brigham

Chapter11: Cash Flow Estimation And Risk Analysis

Section: Chapter Questions

Problem 8P: The Rodriguez Company is considering an average-risk investment in a mineral water spring project...

See similar textbooks

Similar questions

A grocery store is considering the purchase of a new refrigeration unit with an Initial Investment of $412,000, and the store expects a return of $100,000 in year one, $72000 in years two and three, $65,000 in years four and five, and $38,000 in year six and beyond, what is the payback period?
If a garden center is considering the purchase of a new tractor with an initial investment cost of $120,000, and the center expects a return of $30,000 in year one, $20,000 in years two and three. $15,000 In years four and five, and $10,000 in year six and beyond, what is the payback period?
Gina Ripley, president of Dearing Company, is considering the purchase of a computer-aided manufacturing system. The annual net cash benefits and savings associated with the system are described as follows: The system will cost 9,000,000 and last 10 years. The companys cost of capital is 12 percent. Required: 1. Calculate the payback period for the system. Assume that the company has a policy of only accepting projects with a payback of five years or less. Would the system be acquired? 2. Calculate the NPV and IRR for the project. Should the system be purchasedeven if it does not meet the payback criterion? 3. The project manager reviewed the projected cash flows and pointed out that two items had been missed. First, the system would have a salvage value, net of any tax effects, of 1,000,000 at the end of 10 years. Second, the increased quality and delivery performance would allow the company to increase its market share by 20 percent. This would produce an additional annual net benefit of 300,000. Recalculate the payback period, NPV, and IRR given this new information. (For the IRR computation, initially ignore salvage value.) Does the decision change? Suppose that the salvage value is only half what is projected. Does this make a difference in the outcome? Does salvage value have any real bearing on the companys decision?
Each of the following scenarios is independent. All cash flows are after-tax cash flows. Required: 1. Patz Corporation is considering the purchase of a computer-aided manufacturing system. The cash benefits will be 800,000 per year. The system costs 4,000,000 and will last eight years. Compute the NPV assuming a discount rate of 10 percent. Should the company buy the new system? 2. Sterling Wetzel has just invested 270,000 in a restaurant specializing in German food. He expects to receive 43,470 per year for the next eight years. His cost of capital is 5.5 percent. Compute the internal rate of return. Did Sterling make a good decision?
Friedman Company is considering installing a new IT system. The cost of the new system is estimated to be 2,250,000, but it would produce after-tax savings of 450,000 per year in labor costs. The estimated life of the new system is 10 years, with no salvage value expected. Intrigued by the possibility of saving 450,000 per year and having a more reliable information system, the president of Friedman has asked for an analysis of the projects economic viability. All capital projects are required to earn at least the firms cost of capital, which is 12 percent. Required: 1. Calculate the projects internal rate of return. Should the company acquire the new IT system? 2. Suppose that savings are less than claimed. Calculate the minimum annual cash savings that must be realized for the project to earn a rate equal to the firms cost of capital. Comment on the safety margin that exists, if any. 3. Suppose that the life of the IT system is overestimated by two years. Repeat Requirements 1 and 2 under this assumption. Comment on the usefulness of this information.
The Rodriguez Company is considering an average-risk investment in a mineral water spring project that has an initial after-tax cost of 170,000. The project will produce 1,000 cases of mineral water per year indefinitely, starting at Year 1. The Year-1 sales price will be 138 per case, and the Year-1 cost per case will be 105. The firm is taxed at a rate of 25%. Both prices and costs are expected to rise after Year 1 at a rate of 6% per year due to inflation. The firm uses only equity, and it has a cost of capital of 15%. Assume that cash flows consist only of after-tax profits because the spring has an indefinite life and will not be depreciated. a. What is the present value of future cash flows? (Hint: The project is a growing perpetuity, so you must use the constant growth formula to find its NPV.) What is the NPV? b. Suppose that the company had forgotten to include future inflation. What would they have incorrectly calculated as the projects NPV?
Bouvier Restaurant is considering an investment in a grill that costs $140,000, and will produce annual net cash flows of $21,950 for 8 years. The required rate of return is 6%. Compute the net present value of this investment to determine whether Bouvier should invest in the grill.
The Ham and Egg Restaurant is considering an investment in a new oven that has a cost of $60,000, with annual net cash flows of $9,950 for 8 years. The required rate of return is 6%. Compute the net present value of this investment to determine whether or not you would recommend that Ham and Egg invest in this oven.
Markoff Products is considering two competing projects, but only one will be selected. Project A requires an initial investment of $42,000 and is expected to generate future cash flows of $6,000 for each of the next 50 years. Project B requires an initial investment of $210,000 and will generate $30,000 for each of the next 10 years. If Markoff requires a payback of 8 years or less, which project should it select based on payback periods?