Phoenix Electronics Inc is evaluating a microprocessor investment. The company's management team rec- ognizes the superiority...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
Phoenix Electronics Inc is evaluating a microprocessor investment. The company's management team rec- ognizes the superiority of the NPV technique, but like the presentational advantages of IRR (for when they have to approach the bank for help with funding), and so propose to use the modified IRR appraisal tech- nique to assess the investment. The appropriate capital market rate of interest is 10%. The investment's expected cash flow is as follows: Year 0123 $m (100) 50 40 50 The terminal value of the project's net cash inflows (i.e. their accumulated value at Year 3 when the project finishes), can be calculated as: Year $m 1 50(1.10)² 60.5 2 40(1.10)' == 44.0 3 50(1.10)º = 50.0 Total terminal value $154.5m The project now has a modified cash flow of: Year $m 0 3 (100) 154.5 The MIRR can now be estimated, as usual, using linear interpolation: NPV at 4% : +$37.50 million NPV at 20% : -$10.59 million 4% + + 37.50 +37.50 - X (20% 4%) = 16.5% MIRR (-10.59) As the investment has an estimated MIRR of 16.5%, which is greater than the capital market interest rate/hurdle rate of 10%, this indicates the investment should be accepted. (The project actually has an NPV of about +$16 million.) Phoenix Electronics Inc is evaluating a microprocessor investment. The company's management team rec- ognizes the superiority of the NPV technique, but like the presentational advantages of IRR (for when they have to approach the bank for help with funding), and so propose to use the modified IRR appraisal tech- nique to assess the investment. The appropriate capital market rate of interest is 10%. The investment's expected cash flow is as follows: Year 0123 $m (100) 50 40 50 The terminal value of the project's net cash inflows (i.e. their accumulated value at Year 3 when the project finishes), can be calculated as: Year $m 1 50(1.10)² 60.5 2 40(1.10)' == 44.0 3 50(1.10)º = 50.0 Total terminal value $154.5m The project now has a modified cash flow of: Year $m 0 3 (100) 154.5 The MIRR can now be estimated, as usual, using linear interpolation: NPV at 4% : +$37.50 million NPV at 20% : -$10.59 million 4% + + 37.50 +37.50 - X (20% 4%) = 16.5% MIRR (-10.59) As the investment has an estimated MIRR of 16.5%, which is greater than the capital market interest rate/hurdle rate of 10%, this indicates the investment should be accepted. (The project actually has an NPV of about +$16 million.)
Expert Answer:
Answer rating: 100% (QA)
Based on the information provided the management team of Phoenix Electronics Inc is evaluating a mic... View the full answer
Related Book For
Crafting and Executing Strategy The Quest for Competitive Advantage
ISBN: 978-0078029509
19th edition
Authors: Arthur Thompson, Margaret Peteraf, John Gamble, A. J. Strickland III
Posted Date:
Students also viewed these finance questions
-
Before you begin this assignment, be sure you have read the UMUC Family Clinic Case Study below and your Week 1 and Week2 syllabus readings, which discuss EHR functionality and Process...
-
Planning is one of the most important management functions in any business. A front office managers first step in planning should involve determine the departments goals. Planning also includes...
-
Consider a corporate bond with a 10.5% coupon rate, paid semi-annually, $1000 par value and a current market price of $766.70. It matures in exactly 20 years. What is the yield to maturity (YTM) on...
-
Nascent, Inc., acquires 60 percent of Sea-Breeze Corporation for $414,000 cash on January 1, 2015. The remaining 40 percent of the Sea-Breeze shares traded near a total value of $276,000 both before...
-
Explain the relationship between an action potential and impulse conduction down an axon.
-
1. Your instructor will divide the class into teams and assign each team the task of investigating the start-up of one of the following businesses: a. Submarine sandwich shop b. Day care service c....
-
Selected ledger accounts for Rolm Company are given below for the just completed year: Required: 1. What was the cost of raw materials put into production during the year? 2. How much of the...
-
Create an interface, Stock derivatives, with two attributes viz., delta=0.5 and vega=0.2 which are used to determine option premium of a stock. Also add an abstract method Find Premium. Write a class...
-
In this problem, we continue the accounting for Fitness Equipment Doctor, Inc., from Chapter 3. On June 1, Fitness Equipment Doctor, Inc., expanded its business and began selling and installing gym...
-
For the below problem you will need to reference the "Kodak-Anthropometry.pdf" file provided on Canvas. Neatly show all work for partial credit. 1. A desk is 30 inches tall. The desk chair has a seat...
-
The critical angle for a diamond surrounded by air is 24.4 degrees. What is the index of refraction for diamond? Show your work.
-
(a) Suppose you start investing $0.25 per day from the day you are born. Assume that each year has 365 days and that you can invest at the rate of 11.83% (the average annual effective market return...
-
If a resource is scheduled to work M-F, 8am-5pm with a 1hr lunch break, on a task whose duration is 35h, what type of resource would be considered for that week?
-
The Foxtrott Group has recently discovered a new market for its products. The company expects to grow rapidly while its competitors have not realized this opportunity. Dividend payments are expected...
-
If the purpose of evaluation is to improve career planning services, you would choose the kind of evaluation known as? Explain
-
1. Draw a frequency domain diagram of a Y-Delta 3 phase circuit with the following parameters: a. Source voltages va(t) = 155.6-cos(377-t) b. Line Impedances ZaA = 3.77j c. Load Impedances ZA = 20...
-
Propose a reasonable mechanism for the following reaction. OH
-
What are Kodak's competitively important resources and capabilities? Which of its resources have the greatest competitive power? Are any of its resources and capabilities able to pass all four VRIN...
-
Does Walt Disney's portfolio exhibit good strategic fit? What value-chain match-ups do you see? What opportunities for skills transfer, cost sharing, or brand sharing do you see?
-
What chief difference(s) do you see between Chipotle's strategy and the strategy being employed at Moe's Southwest Grill?
-
Answer the following questions: 1. Name at least five industries that might be affected by weather. 2. Is it appropriate for the forensic accountant/fraud examiner to examine the effect of weather?...
-
Discuss why collusive frauds, especially when perpetrated among related parties, is particularly difficult to detect?
-
In what year was the original company formed?
Study smarter with the SolutionInn App