Compute the Internal Rate of Return (IRR) for the project Purchase Equipment only, given that it falls between 11% and 13%. The PV Factors for 13% are provided below
YEAR
PV FACTORS (13%)
1
0.8850
2
0.7831
3
0.6931
Additional Info if you need it:
ProForma Income Statement
Particulars
Amount
Amount
Sales [a]
2800000 x 1.15
3,220,000
Less Cost of Goods Sold
1400000 x 1.15 =1,610,000
Less Selling & Marketing Costs
75000 x 1.15 = 86,250
Less Admin Expenses
25000 x 1.15 = 28750
Less DepreciationExps.[Unchanged] [b]
50,000
1,775,000
EBIT [a-b] [c]
1,445,000
Less Interest [d]
20,000
EBT [c-d] [d]
1,425,000
Less Income Tax at 20% [e]
285,000
Net Income [d-e] [f]
1,140,000
Dividend Pay -out 50% [f/2] [g]
570,000
Addition to Retained Earnings [g/2][h]
570,000
Proforma Balance Sheet:
Liabilities
Amount
Amount
Assets
Amount
Amount
Current Liabilities
2220 x1.15
2,553,000
Current Assets
2360 x 1.15
2,714,000
Total Equity
1812+570
2,382,000
Non Current Assets[Unchanged]
2240
2,240,000
Non Current Liabilities
19,000***
4,954,000
4,954,000
*** balancing figure.
No additonal
finance is required
in 2021
Transcribed Image Text:CASE ANALYSIS - CARRIUM INSIGHTS INC.
The following comprehensive assessment is based on a continuing case study of Carrium Insights Inc.
The following financial statements have been provided:
Carrium Insights Inc.
Income Statement
For the year ended December 31, 2020
2020
('000s)
2,800
Sales
Cost of Goods Sold
Selling & Marketing Costs
Admin. Expenses
Depreciation Expense
Eamings before Interest & Taxes
Interest Expense
(1,400)
(75)
(25)
(50)
1,250
(20)
1,230
Taxable Income
Taxation (20%)
Net Income
(246)
984
Dividends (50%)
Addition to Retained Eamings
492
492
Carrium Insights Inc.
State ment of Financial Positi on
As at December 31, 2019 & 2020
2019
2020
2019
2020
('000s)
('000s)
('000s)
('000s)
ASSETS
LIABILITIES & EQUITY
Current Asse ts
Current Liabilities
Inventories
600
680
Accounts Payables
Nates Payables
1,100
1,360
Accounts Receivables
300
340
700
860
1,340
2,360
Cash & Equivalents
1, 100
1,800
2,220
2,000
Non-current Liabilites
770
568
Non Current Asse ts, Net
1,870
2,240
Total Liabilities
2,570
2,788
Equity
Common Stock
820
840
Retained Eamings
Total Equity
480
972
1,300
1,812
TOTAL ASSETS
3,870
4,600
TOTAL LIAB. & EQUITY
3,870
4,600
Transcribed Image Text:Despite the actual Weighted Average Cost of Capital calculated in question 3, as noted in Part A of this
question, the company is seeking to reduce its WACC. As such, the Finance Manager has decided to
use a minimum required return of 11% for the following capital budgeting evaluation scenario.
Based on the results of the pro-forma statement in Question 2 Part A, Carrium is expected to have
excess financing in 2021. Instead of reducing this position, the company can simply increase its cash
position. If it does so, it is considering utilizing this excess cash to either expand its retail outlet or
purchase a new piece of equipment which will improve operations.
You have been tasked with evaluating the quantitative aspects of the projects, which are mutually
exclusive. The projected cash flows of both projects are as follows:
Project
Years
Purchase
Expand
(400,000)
100,000
150,000
250,000
Equipment
(300,000)
100,000
115,000
175,000
1
3
As noted above, the company has a required rate of return of 11%. The following PV factors are
provided:
PV Factor
Year
(11%)
0.9009
0.8116
1
2
3
0.7312
Definition Definition Discount rate of a project wherein its net present value equals zero. Internal rate of return equates the present value of future cash flows with the initial investments. Internal rate of return helps to determine nominal cash flows.
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