Question

Scissor tail Partners is evaluating a proposal to purchase two idle manufacturing facilities located near Blackwell, Oklahoma. The combined cost of purchasing these properties would be $20 million. Each facility has 3000 amps of 480 volt 3 phase electrical power and close proximity to the air cargo facilities at Cherokee Strip regional airport. However, an immediate expenditure of $10 million dollars will be required to install cleanrooms in each facility and bring the electrical wiring into compliance with local building codes. The total time required to upgrade and resell both properties is expected to span four years. The CFO for Scissortail projects that at the end of two years the first facility can be sold for $30 million. The second facility, whose configuration is somewhat less desirable, will take four years to sell, with an expected selling price of $18 million. Revisions to the tax code designed to help stimulate the economy exempt any profits from renovating idle manufacturing capacity from all State and Federal taxes. Assuming that the date 2 cash flows from the project can be reinvested at an annual rate of 3.50 percent:

a. determine the internal rate of return for the project. (5 points)

b. determine the reinvested rate of return for the project. (5 points)

c. concisely explain why the reinvested rate of return is greater than or less than the internal rate of return for the project (no points will be awarded for a simple comparison of the internal rate of return and the reinvested rate of return). (5 points)

Answer 1