M9 CaseStudy Part1

Topics: Cash flow, Net present value, Internal rate of return Pages: 2 (266 words) Published: December 16, 2014
Case Study:
Assume Polaris invested $2.12 million to expand its manufacturing capacity. Assume that these projects have a ten-year life and that management requires a 10% internal rate of return on these assets. Ques 1. What is the amount of annual cash flows that Polaris must earn from these projects to have a 10% internal rate of return? Solution 1:Initial Investment=$2.12 million=$212000

Time Period (n) =10 years
At IRR,=10%,Net Present Value of Investment=0
i.e. Present Value of 10 years Cash Flow-Initial Investment=0 Initial Investment =Present Value of 10 year Cash Flow
We will get Present value of 10 year equal cash flow(CF) using annuity formula Initial Investment=CF*(1-(1+IRR)^(-n))/IRR
$212000=CF*(1-(1+10%)^(-10))/10%
CF=$212000*10%/(1-0.385543)
CF=$212000*10%*0.614457
CF=$345020.6
So Polaris must earn =$345020.6 from these projects for 10 years so that IRR becomes 10%

Ques 2 . Assess Polaris’s most recent annual financial statements, from its website (polaris.com) or the SEC’s website (sec.gov). a. Determine the amount that Polaris invested in capital assets for that year. (Hint:  Refer to the statement of cash flows.) b. Assume a ten-year life and a 10% internal rate of return. What is the amount of cash flows that Polaris must earn on these new projects? Ans 2 a )Using Polaris website and seeing it’s a cash flow statement we get for year 2012 at amount invested by Polaris in Capital Assets =$103083 Ans 2 b) Time Period (n) =10 years.

Internal Rate of Return (IRR)=10%
Let Cash Flows which Polaris must earn every year on these new projects be CF We have $103083=CF*(1-(1+IRR)^(-n))/IRR
CF=$103083/(1-(1+10%)^(-10))*10%
CF=$103083/0.614457%10%
CF=$16776.28
So Polaris must earn =$16776.28 on these new projects
Continue Reading

Please join StudyMode to read the full document

You May Also Find These Documents Helpful

  • Casestudy Essay
  • Casestudy Essay
  • Casestudy Research Paper
  • Essay about CaseStudy
  • Casestudy Essay
  • Casestudy Essay
  • Casestudy Essay
  • casestudy Essay

Become a StudyMode Member

Sign Up - It's Free