Tabletop Ranches is considering the purchase of a new helicopter for $390,000. T
ID: 2826632 • Letter: T
Question
Tabletop Ranches is considering the purchase of a new helicopter for $390,000. This purchase is expected to increase Tabletop's cash flow by $62,000 through reduced fuel and maintenance expenses for the next seven (7) years. Its marginal tax rate is 34%, and its weighted-avera cost of capital (WACC) is 11%, what is its IRR and will this purchase maximize shareholders wealth? Select one: a. IRR is 2.75% and does not maximize shareholders' wealth. b. IRR is 8.23% and does not maximize shareholders' wealth. C. IRR is 11.23% and does maximize shareholders' wealth. d. IRR is 11.23% and does not maximize shareholders wealth.Explanation / Answer
Correct option is > a. IRR is 2.75% and does not maximize shareholder’s wealth
IRR should be more than WACC to maximize the wealth of shareholders.
We should calculate for IRR by trial and error method. The IRR is rate where sum of all present values (in last column below) equals to zero or near to zero.
Year
Net Cash flows
Discount factor = Df = 1/(1+2.74616%)^Y
Present Values
Y
CF
Df
Df x Net Cash flows
0
-390,000.00
1.000000
-390,000.00
1
62,000.00
0.973272
60,342.89
2
62,000.00
0.947259
58,730.07
3
62,000.00
0.921941
57,160.35
4
62,000.00
0.897300
55,632.59
5
62,000.00
0.873317
54,145.66
6
62,000.00
0.849975
52,698.48
7
62,000.00
0.827258
51,289.98
IRR =
2.74616%
Total =
0.02
IRR = 2.75%
Year
Net Cash flows
Discount factor = Df = 1/(1+2.74616%)^Y
Present Values
Y
CF
Df
Df x Net Cash flows
0
-390,000.00
1.000000
-390,000.00
1
62,000.00
0.973272
60,342.89
2
62,000.00
0.947259
58,730.07
3
62,000.00
0.921941
57,160.35
4
62,000.00
0.897300
55,632.59
5
62,000.00
0.873317
54,145.66
6
62,000.00
0.849975
52,698.48
7
62,000.00
0.827258
51,289.98
IRR =
2.74616%
Total =
0.02
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