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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?

Solution Summary

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