Question

Lily’s Loving Laundry is thinking about installing a new steam press at its facility so it can add in-house pressing services to its product offerings. The new press steamer will cost $14,400. It will last for five years, be depreciated on a straight-line basis to a salvage value of $4000 but will be resold for $1,400 after five years (assume no taxes apply).

Lily estimates its demand to press shirts as: 9000, 9000, 9000, 9200, 9200 in years one through five respectively. A new steam press operator will need to be hired at $13.00 per hour and will work 40 hours per month for the year. That employee will get a raise of $0.25 per year every year starting in the second year. Shirts currently cost customers $3 for dry cleaning; and an additional charge of $1.35 will be added for pressing. Lily will also need to add a $1,500 annual insurance policy to cover any steam-related accidents.

Assume Lily pays 17% in tax on its taxable income and is looking at a five-year return period over which she would expect to earn a 10% rate of return.

What is the IRR of the project (rounded to the fourth decimal)?

Lily’s Loving Laundry is thinking about installing a new steam press at its facility so it can add in-house pressing services to its product offerings. The new press steamer will cost $14,400. It will last for five years, be depreciated on a straight-line basis to a salvage value of $4000 but will be resold for $1,400 after five years (assume no taxes apply).

Lily estimates its demand to press shirts as: 9000, 9000, 9000, 9200, 9200 in years one through five respectively. A new steam press operator will need to be hired at $13.00 per hour and will work 40 hours per month for the year. That employee will get a raise of $0.25 per year every year starting in the second year. Shirts currently cost customers $3 for dry cleaning; and an additional charge of $1.35 will be added for pressing. Lily will also need to add a $1,500 annual insurance policy to cover any steam-related accidents.

Assume Lily pays 17% in tax on its taxable income and is looking at a five-year return period over which she would expect to earn a 10% rate of return.

What is the IRR of the project (rounded to the fourth decimal)?

A) .1165
B) .1300
C) Negative
D) None of the above

Answer 1

B G 5 H 1 2 0 $14,400.00 9,000 9,000 9,000 9,200 9,200 1 Year 2 Cost of Machine 3 Annual Demand 4 5 Additional income from pressing 6 Less: Depreciation 7 Less: Employee costs 8 Less: Annual Insurance 9 Earnings before tax 10 Less: Tax@17% 11 Net Income 12 Add: Depreciation 13 Cash flow from operations 14 Add: Salvage value 15 16 Total Cash Flows 17 18 IRR (Option B) 19 $12,150.00 $2,080.00 $6,240.00 $1,500.00 $2,330.00 $396.10 $1,933.90 $2,080.00 $4,013.90 $12,150.00 $2,080.00 $6,360.00 $1,500.00 $2,210.00 $375.70 $1,834.30 $2,080.00 $3,914.30 $12,150.00 $2,080.00 $6,480.00 $1,500.00 $2,090.00 $355.30 $1,734.70 $2,080.00 $3,814.70 $12,420.00 $2,080.00 $6,600.00 $1,500.00 $2,240.00 $380.80 $1,859.20 $2,080.00 $3,939.20 $12,420.00 $2,080.00 $6,720.00 $1,500.00 $2,120.00 $360.40 $1,759.60 $2,080.00 $3,839.60 $1,400.00 -$14,400.00 $4,013.90 $3,914.30 $3,814.70 $3,939.20 $5,239.60 0.1333

14400 9000 9000 9200 9200 1 Year 2 Cost of Machine 3 Annual Demand 4 5 Additional income from pressing 6 Less: Depreciation 7 Less: Employee costs 8 Less: Annual Insurance 9 Earnings before tax 10 Less: Tax@17% 11 Net Income 12 Add: Depreciation 13 Cash flow from operations 14 Add: Salvage value 15 16 Total Cash Flows =C3*1.35 =D3*1.35 =E3*1.35 =F3*1.35 =(B2-4000)/5 =C6 =D6 =E6 =13*40*12 =(13+0.25)*40*12 =(13+0.25+0.25)*40*12 =(13+0.25+0.25+0.25)*40*12 1500 1500 1500 1500 =C5-C6-C7-C8 =D5-D6-07-08 =E5-E6-E7-E8 =F5-F6-F7-F8 =C9*17% =D9*17% =E9*17% =F9*17% =C9-C10 =D9-D10 =E9-E10 =F9-F10 =C6 =D6 =E6 =F6 =C11+C12 =D11+D12 =E11+E12 =F11+F12 =G3*1.35 =F6 =(13+0.25+0.25+0.25+0.25)*40*12 1500 =G5-G6-G7-G8 =G9*17% =G9-G10 =G6 =G11+G12 1400 =-(B2+B3) =C13+C15 =D13+D15 =E13+E15 =F13+F15 =G13+G15+G14 17 =IRR(B16:G16,13) 18 IRR 19