D to compute irr use trial and error or a financial

d.
To compute IRR, use trial and error or a financial calculator to solve for r in the following equation:
$38,300
+
$25,700
+
$20,900
+
$19,100
= $88,000 IRR = 8.07%
1 + r (1 + r )
2
(1 + r )
3
(1 + r
Blooper Industries must replace its magnoosium purification system. Quick & Dirty Systems sells a
relatively cheap purification system for $25 million. The system will last 5 years. Do-It-Right sells a
sturdier but more expensive system for $28 million; it will last for 7 years. Both systems entail $3 million
in operating costs; both will be depreciated straight-line to a final value of zero over their useful lives;
neither will have any salvage value at the end of its life. The firm’s tax rate is 40%, and the discount rate
is 16%.
a. Calculate the equivalent annual cost of each alternative: (Do not round intermediate calculations.
Enter your answers in millions rounded to 3 decimal places.)
)
4

b. Which system should Blooper install?

3 10,000
4 4,000
Thereafter 0
It is expected that net working capital will amount to 20% of sales in the following year. For example, the
store will need an initial (year-0) investment in working capital of .20 × 28,000 × $60 = $336,000. Plant
and equipment necessary to establish the Giftware business will require an additional investment of
$206,000. This investment will be depreciated using MACRS and a 3-year life. After 4 years, the
equipment will have an economic and book value of zero. The firm’s tax rate is 20%. What is the net
present value of the project? The discount rate is 12%. (Do not round intermediate calculations.
Round your answer to the nearest dollar amount.)
Net present value $
rev: 05_12_2012
Explanation:
Some values below may show as rounded for display purposes, though unrounded numbers should be
used for the actual calculations.
All figures in thousands
0 1 2 3 4
Net
workin
g
capital
$ 336 $ 432 $ 120 $ 48 $ 0
Inves
tment
in
NWC
336 96 −312 −72 −48
Inves
tment
in
plant &
equip
ment
206 0 0 0 0
Cash
flow
from
invest
ment
activity
$−542 $ −96 $+312 $ +72 $ +48
All figures in thousands
0 1 2 3 4
Reven
ue
$
1,680.00
$
2,160.00 $ 600.00
$240.00
Cost
1,120.00 1,440.00
400.00 160.00
Deprec 68.70 91.60 30.50 15.26