Reference no: EM132874629
Problem 1 - Emery Communications Company is considering the production and marketing of a communications system that will increase the efficiency of messaging for small businesses or branch offices of large companies. Each unit hooked into the system is assigned a mailbox number, which can be matched to a telephone extension number, providing access to messages 24 hours a day. Up to 20 units can be hooked into the system, allowing the delivery of the same message to as many as 20 people. Personal codes can be used to make messages confidential. Furthermore, messages can be reviewed, recorded, cancelled, replied to, or deleted all during the same message playback. Indicators wired to the telephone blink whenever new messages are present. To produce this product, a $1.75 million investment in new equipment is required. The equipment will last 10 years but will need major maintenance costing $150,000 at the end of its sixth year. The salvage value of the equipment at the end of 10 years is estimated to be $100,000. If this new system is produced, working capital must also be increased by $90,000. This capital will be restored at the end of the product's 10-year life cycle. Revenues from the sale of the product are estimated at $1.65 million per year. Cash operating expenses are estimated at $1.32 million per year.
Required - Assuming that Emery's cost of capital is 12%, compute the project's NPV. Should the product be produced?
Problem 2 - Julianna Cardenas, owner of Baker Company, was approached by a local dealer of air-conditioning units. The dealer proposed replacing Baker's old cooling system with a modern, more efficient system. The cost of the new system was quoted at $339,000, but it would save $60,000 per year in energy costs. The estimated life of the new system is 10 years, with no salvage value expected. Excited over the possibility of saving $60,000 per year and having a more reliable unit, Julianna requested an analysis of the project's economic viability. All capital projects are required to earn at least the firm's cost of capital, which is 8%. There are no income taxes.
Required - Calculate the project's IRR. Should the company acquire the new cooling system?