Manufacturing Enterprises, Inc. is considering 2 investment proposals. The first

Question

Manufacturing Enterprises, Inc. is considering 2 investment proposals. The first calls for a major renovation of the company's manufacturing facility. The second involves replacing just a few pieces of equipment in the facility. The company must choose one project this year, but not both. the cash flow associated with each project is below, and the firm discounts project cash flows at 15%.

Year Renovate Replace

0 -$9,000,000 $-1,000,000

1 3,500,000 600,000

2 3,000,000 500,000

3 3,000,000 400,000

4 2,800,000 300,000

5 2,500,000 200,000

Explanation / Answer

Renovate

NPV= -9000000+(3500000/1.15)+(3000000/1.15^2)+(3000000/1.15^3)+(28000000/1.15^4)+(2500000/1.15^5)= $ 1128308.886

IRR

9000000=(3500000/r)+(3000000/r^2)+(3000000/r^3)+(28000000/r^4)+(2500000/r^5)

IRR= 20.49%

Replace

NPV= -1000000+(600000/1.15)+(500000/1.15^2)+(400000/1.15^3)+(300000/1.15^4)+(200000/1.15^5)= $ 433778.78

IRR

1000000= (600000/r)+(500000/r^2)+(400000/r^3)+(300000/r^4)+(200000/r^5)

IRR= 36.08%

Related Questions

Navigate

• Browse (All)
• Browse M
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.