Question

4. Alyeska Salmon Inc., a large salmon canning firm operating out of Valdez, Alaska, has a new automated production line project it is considering. The project has a cost of $275,000 and has an expected life of eight years. The project provides after-tax annual cash flows of $73,306 per year for the first five years. In year 6, there is cash OUTFOW of $100,000. For years 7-8, the net cash flows will be $89,000 per year. The firm’s management is uncomfortable with the IRR reinvestment assumption and prefers the modified IRR approach. You have calculated a cost of capital for the firm of 12 percent. Calculate the project’s MIRR. Show all your work. Should the project be accepted? Explain why or why not.    

5. Donaldsen International is an all-equity firm with a total market value of $120,000. The firm has 10,000 shares of stock outstanding. Management is considering issuing $50,000 of debt at an interest rate of 6.5 percent and using the proceeds on a stock repurchase. Management believes that the company will have earnings before interest and taxes (EBIT) of $22,000 if the economy is normal, $12,000 if it is in recession, and $30,000 if the economy booms. Ignore taxes. Compute earnings per share (EPS) and ROE for this firm if the economy booms and the firm proceeds with the share repurchase. Show your work.

6. Marge's Campground is considering adding a miniature golf course to its facility. The course equipment she wants would cost $300,000, and would be depreciated on a straight line basis over 10 years with zero salvage value. However, Marge estimates that the project will be run for 4 years only, and a 4-year time horizon will be used. Further, assume that the company can sell the equipment for $200,000 at the end of year 4. Marge estimates the income from the golf fees would be $280,000 a year with $100,000 variable cost. The fixed cost would be $50,000.. The project will require $10,000 of net working capital which is recoverable at the end of the project. Assume a 34% marginal tax rate for the company and the project’s required rate of return of 12 percent.  

a. Calculate annual operating CFs for the miniature golf facility for years 1-4. Show your work.

b. What is the BV of the equipment at the end of year 4? Is there a tax liability or tax credit on the sale of the equipment? Calculate total CF for year 4 including the after-tax selling price.

c. What is the NPV of this project? Would you accept this project?

Please provide details would prefer if it wasn't done in EXCEL!

Answer 1

Future value of cash inflows = 73,306*(1.12)⁷ + 73,306*(1.12)⁶ + 73,306*(1.12)⁵ + 73,306*(1.12)⁴ +  73,306*(1.12)³ + 89000*(1.12) +89,000

= 162,056.21125 + 144,693.04576 + 129,190.21943 + 115,348.41020 + 102,989.65197 + 99680 + 89000

= 842,957.53861

present value of cost = -275,000 - (100,000/(1.12)⁶) = -275,000 - 50663.11212 = -325,663.11212

MIRR = (future value/cost)^{(1/period of investment)} -1

= (842,957.53861/325,663.11212)^(1/8) - 1 = 1.126236612 - 1 = 0.126236612 or 12.6236612% or 12.62%

Since MIRR> cost of capital

the project should be accepted