Pandora, Inc. is considering a five-year project that has an initial outlay or cost of $70,000. The cash inflows from its project for years 1, 2, 3, 4 and 5 are all the same at $14,000. The borrowing costs are 10%. What is the IRR?
Should Pandora use the IRR method to evaluate this project? Explain.
What will be an ideal response?
Answer: Using a financial calculator or software program like Excel or trial and error, we get an IRR that is exactly equal to zero percent (this is because the undiscounted sum of all future inflows equals the initial outlay, e.g., $14,000 × 5 = $70,000). It does not appear that Pandora will accept this project since its borrowing costs of 10% will be greater than 0%. Thus, Pandora can use the IRR method if it likes because it does indicate the project should not be accepted. Pandora can verify its rejection decision of the project by computing its NPV, which is about -$16,929.
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Samuel Corp has provided the following information for the year ended December 31, 2017
Samuel Corp Comparative Balance Sheet December 31, 2017 and 2016 Increase 2017 2016 (Decrease) Cash $33,000 $13,000 $20,000 Accounts Receivable 29,000 36,000 (7,000 ) Merchandise Inventory 56,000 29,000 27,000 Plant Assets, net 126,000 92,000 34,000 Total Assets $244,000 $170,000 $74,000 Accounts Payable $9,000 $13,000 $(4,000 ) Accrued Liabilities 7,000 3,000 4,000 Long-term Notes Payable 70,000 79,000 (9,000 ) Total Liabilities 86,000 95,000 (9,000 ) Common Stock 55,000 3,000 52,000 Retained Earnings 115,000 78,000 37,000 Treasury Stock (12,000 ) (6,000 ) (6,000 ) Total Stockholders' Equity 158,000 75,000 83,000 Total Liabilities and Stockholders' Equity $244,000 $170,000 $74,000 Samuel Corp Income Statement Year ended December 31, 2017 Sales Revenue $291,300 Interest Revenue 1,000 Gain on Sale of Plant Assets 6,000 Total Revenues and Gains $298,300 Cost of Goods Sold 145,000 Salaries and Wages Expense 49,000 Depreciation Expense-Plant Assets 16,000 Other Operating Expense 25,000 Interest Expense 3,500 Income Tax Expense 7,800 Total Expenses 246,300 Net Income $52,000 Additional information provided by the company includes the following: Equipment costing $60,000 was purchased for cash. Equipment with a net book value of $10,000 was sold for $16,000. Depreciation expense of $16,000 was recorded during the year. During 2017, the company repaid $43,000 of long-term notes payable. During 2017, the company borrowed $34,000 on a new long-term note payable. There were no stock retirements during the year. There were no sales of treasury stock during the year. All sales are on credit. Prepare the 2017 statement of cash flows, using the indirect method. What will be an ideal response
When BMW Motorcycles first began targeting some advertisements toward females, the impact was minimal at first, but after some time passed began to have an impact on inquiries by females and later on sales revenue. This illustrates the concept of:
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