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Payback Period, NPV, PI, IRR, and MIRR

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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?

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Solution Summary

The solution discusses payback period, NPV, PI, IRR and MIRR as it pertains to a company.

Solution provided by:
Jayant Kumar, MBA
Education
  • MBA, Indian Institute of Finance
  • Bsc, Madras University
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