Payback Period, NPV, PI, IRR, and MIRR
Question 1
Delicious Snacks, Inc. is considering adding a new line of
candies to its current product line. The company already paid $300K for a
marketing research that provided evidence about the convenience of this product
at this time. The new line will require an additional investment of $70K in raw
materials to produce the candies. The project’s life is 7 years and the firm
estimates selling 1.5M packages at a price of $1 per unit the first year; but
this volume is expected to grow at 17% the next two years, then at 12% for the
following two years, and finally at 7% for the last two years of the project.
The price per unit is expected to grow at the historical average rate of
inflation of 3%. The variable costs will amount 70% of sales and the fixed
costs will be $500K. The equipment required to produce the candies will cost
$750K, and will require an additional $30K to have it delivered and installed.
This equipment has an expected useful life of 7 years and it will be
depreciated using the MACRS 5-year class life. After seven years the equipment
can be sold at a price of $200K. The firm plans financing the new equipment
with 30K semiannual coupon bonds that mature in 30 years, with $1,000 face
value, 5% coupon rate, and 12% yield to maturity. The cost of capital is 12%
and the firm’s marginal tax rate is 40%.
Determine the payback period, discounted payback period,
NPV, PI, IRR, and MIRR of the new line of candies. Should the firm accept or
reject the project?
Question 2
The Claustrophobic Solution, Inc., a residential window and
door manufacturer, has the following historical record of earnings per share
(EPS) from 2011 to 2007:
2011 2010 2009 2008 2007
EPS $1.10 $1.05
$1.00 $0.95 $0.90
The company’s payout ratio has been 60% over the last five
years and the last quoted price of the firm’s share of stock was $10. Flotation
costs for new equity will be 7%. The company has 30,000,000 of common shares of
stock outstanding and a debt-equity ratio of 0.5. If dividends are expected to
grow at the same arithmetic average growth rate of the last five years, what is
the dividend payment in 2012?
