Homework Help is Here – Start Your Trial Now!
Business
Accounting
What is the estimated Internal Rate of Return (IRR) of the project? Should the project be accepted based on the IRR?

What is the estimated Internal Rate of Return (IRR) of the project? Should the project be accepted based on the IRR?

Intermediate Financial Management (MindTap Course List)
Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Eugene F. Brigham, Phillip R. Daves
Chapter13: Capital Budgeting: Estimating Cash Flows And Analyzing Risk
Section: Chapter Questions
Problem 1P: Talbot Industries is considering launching a new product. The new manufacturing equipment will cost...
See similar textbooks
icon
Related questions
Question

What is the estimated Internal Rate of Return (IRR) of the project?
Should the project be accepted based on the IRR?

The introduction of the new line of portable ECG machines will cause a net decrease of $50,000 each year in profit contribution after taxes, due to a decrease in sales of the other lines of tester machines produced by the company. By investing in the new product line Pharmos Incorporated would have to use a packaging machine which the company already has and will be sold at the end of the project for $350,000 after-tax in the equipment market. The company's financial analyst has advised Pharmos Incorporated to use the weighted average cost of capital as the appropriate discount rate to evaluate the project. The following information about the company's sources of financing is provided below: • The company will contract a new loan in the sum of $2,000,000 that is secured by machinery and the loan has an interest rate of 6 percent. Pharmos Incorporated has also issued 4,000 new bond issues with an 8 percent coupon, paid semi-annually and matures in 10 years. The bonds were sold at par, and incurred floatation cost of 2 percent per issue. • The company's preferred stock pays an annual dividend of 4.5 percent and is currently selling for $60, and there are 100,000 shares outstanding. • There are 300,000 shares of common stock outstanding, and they are currently selling for $21 each. The beta on these shares is 0.95.
Transcribed Image Text:The introduction of the new line of portable ECG machines will cause a net decrease of $50,000 each year in profit contribution after taxes, due to a decrease in sales of the other lines of tester machines produced by the company. By investing in the new product line Pharmos Incorporated would have to use a packaging machine which the company already has and will be sold at the end of the project for $350,000 after-tax in the equipment market. The company's financial analyst has advised Pharmos Incorporated to use the weighted average cost of capital as the appropriate discount rate to evaluate the project. The following information about the company's sources of financing is provided below: • The company will contract a new loan in the sum of $2,000,000 that is secured by machinery and the loan has an interest rate of 6 percent. Pharmos Incorporated has also issued 4,000 new bond issues with an 8 percent coupon, paid semi-annually and matures in 10 years. The bonds were sold at par, and incurred floatation cost of 2 percent per issue. • The company's preferred stock pays an annual dividend of 4.5 percent and is currently selling for $60, and there are 100,000 shares outstanding. • There are 300,000 shares of common stock outstanding, and they are currently selling for $21 each. The beta on these shares is 0.95.
3. Pharmos Incorporated is a Pharmaceutical Company which is considering investing in a new production line of portable electrocardiogram (ECG) machines for its clients who suffer from cardio vascular diseases. The company has to invest in equipment which cost $2,500,000 and falls within a MARCS depreciation of 5-years, and is expected to have a scrape value of $200,000 at the end of the project. Other than the equipment, the company needs to increase its cash and cash equivalents by $100,000, increase the level of inventory by $30,000, increase accounts receivable by $250,000 and increase account payable by $50,000 at the beginning of the project. Pharmos Incorporated expect the project to have a life of five years. The company would have to pay for transportation and installation of the equipment which has an invoice price of $450,000. The company has already invested $75,000 in Research and Development and therefore expects a positive impact on the demand for the new product line. Expected annual sales for the ECG machines in the first three years are $1,200,000 and $850,000 in the following two years. The variable costs of production are projected to be $267,000 per year in years one to three and $375,000 in years four and five. Fixed overhead is $180,000 per year over the life of the project.
Transcribed Image Text:3. Pharmos Incorporated is a Pharmaceutical Company which is considering investing in a new production line of portable electrocardiogram (ECG) machines for its clients who suffer from cardio vascular diseases. The company has to invest in equipment which cost $2,500,000 and falls within a MARCS depreciation of 5-years, and is expected to have a scrape value of $200,000 at the end of the project. Other than the equipment, the company needs to increase its cash and cash equivalents by $100,000, increase the level of inventory by $30,000, increase accounts receivable by $250,000 and increase account payable by $50,000 at the beginning of the project. Pharmos Incorporated expect the project to have a life of five years. The company would have to pay for transportation and installation of the equipment which has an invoice price of $450,000. The company has already invested $75,000 in Research and Development and therefore expects a positive impact on the demand for the new product line. Expected annual sales for the ECG machines in the first three years are $1,200,000 and $850,000 in the following two years. The variable costs of production are projected to be $267,000 per year in years one to three and $375,000 in years four and five. Fixed overhead is $180,000 per year over the life of the project.
Expert Solution
steps

Step by step

Solved in 2 steps with 4 images

SEE SOLUTIONCheck out a sample Q&A here
Blurred answer
Knowledge Booster
Rate Of Return
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.
Similar questions
Recommended textbooks for you
Intermediate Financial Management (MindTap Course…
Intermediate Financial Management (MindTap Course…
Finance
ISBN:
9781337395083
Author:
Eugene F. Brigham, Phillip R. Daves
Publisher:
Cengage Learning
Financial Management: Theory & Practice
Financial Management: Theory & Practice
Finance
ISBN:
9781337909730
Author:
Brigham
Publisher:
Cengage
Cornerstones of Cost Management (Cornerstones Ser…
Cornerstones of Cost Management (Cornerstones Ser…
Accounting
ISBN:
9781305970663
Author:
Don R. Hansen, Maryanne M. Mowen
Publisher:
Cengage Learning
Excel Applications for Accounting Principles
Excel Applications for Accounting Principles
Accounting
ISBN:
9781111581565
Author:
Gaylord N. Smith
Publisher:
Cengage Learning
Fundamentals Of Financial Management, Concise Edi…
Fundamentals Of Financial Management, Concise Edi…
Finance
ISBN:
9781337902571
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
EBK CFIN
EBK CFIN
Finance
ISBN:
9781337671743
Author:
BESLEY
Publisher:
CENGAGE LEARNING - CONSIGNMENT
SEE MORE TEXTBOOKS