SOLVING FOR UNKNOWNS
Each of the following cases is independent. Assume that all cash flows are after-tax cash flows.
a. Thomas Company is investing $120,000 in a project that will yield a uniform series of cash inflows over the next four years.
b. Video Repair has decided to invest in some new electronic equipment. The equipment will have a three-year life and will produce a uniform series of cash savings. The NPV of the equipment is $1,750, using a discount rate of 8 percent. The IRR is 12 percent.
c. A new lathe costing $60,096 will produce savings of $12,000 per year.
d. The NPV of a project is $3,927. The project has a life of four years and produces the following cash flows:
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Year 1
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$10,000
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Year 3
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$15,000
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Year 2
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$12,000
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Year 4
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?
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The cost of the project is two times the cash flow produced in year 4. The discount rate is 10 percent.
Required:
1. If the internal rate of return is 14 percent for Thomas Company, how much cash inflow per year can be expected?
2. Determine the investment and the amount of cash savings realized each year for Video Repair.
3. For scenario (c), how many years must the lathe last if an IRR of 18 percent is realized?
4. For scenario (d), find the cost of the project and the cash flow for year 4.