Ice Company is considering investing in a new plant costing $1,850,000. The plant has
a 10-year useful life and a salvage value of $235,000. The following information was developed
by Ice’s controller regarding the new plant (amounts are stated on an annual basis):
Increased Revenue $1,220,000
Less: Increased Expenses
Salaries of additional personnel (416,500)
Materials, supplies, etc. (389,450)
Maintenance ( 9,000)
Net Operating Income $243,550
The company has a debt to equity ratio of 200% ($2 of debt for every $1 of equity). The after-tax cost of debt is 6% and the cost of equity is 12%.
a. Compute the accounting rate of return, rounded to 2 decimal places.
b. Compute the net cash flow generated per year for years 1-10 .
c. Compute the weighted average cost of capital .
d. How many years will it take for the project to “pay for itself.” Round to 2 decimal places.
e. Compute the NPV
f. Compute the IRR.
g. Without calculating exact numbers, indicate whether and how the following measures would change if the company shifted its financing structure to be more heavily weighted toward equity than debt.
Accounting rate of return