exercise 14-29

Project Description:

each of the following scenarios is independent. assume that all cash flows are after-tax cash
flows.
a. 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
b. 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%.
c. 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%. should the
new equipment be purchased?
2. calculate kathy short’s irr. should she acquire the new system?
3. what should be elmo enterprises’ expected annual cash flow from the plant?

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