Tabletop Ranches is considering the purchase of a new helico

Tabletop Ranches is considering the purchase of a new helicopter for $390,000. This purchase is expected to increase Tabletop\'s cash flow by $62,000 through reduced fuel and maintenance expenses for the next seven (7) years. Its marginal tax rate is 34%, and its weighted-avera cost of capital (WACC) is 11%, what is its IRR and will this purchase maximize shareholders wealth? Select one: a. IRR is 2.75% and does not maximize shareholders\' wealth. b. IRR is 8.23% and does not maximize shareholders\' wealth. C. IRR is 11.23% and does maximize shareholders\' wealth. d. IRR is 11.23% and does not maximize shareholders wealth.

Solution

Correct option is > a. IRR is 2.75% and does not maximize shareholder’s wealth

IRR should be more than WACC to maximize the wealth of shareholders.

We should calculate for IRR by trial and error method. The IRR is rate where sum of all present values (in last column below) equals to zero or near to zero.

Year

Net Cash flows

Discount factor = Df = 1/(1+2.74616%)^Y

Present Values

Y

CF

Df

Df x Net Cash flows

0

-390,000.00

1.000000

-390,000.00

1

62,000.00

0.973272

60,342.89

2

62,000.00

0.947259

58,730.07

3

62,000.00

0.921941

57,160.35

4

62,000.00

0.897300

55,632.59

5

62,000.00

0.873317

54,145.66

6

62,000.00

0.849975

52,698.48

7

62,000.00

0.827258

51,289.98

IRR =

2.74616%

Total =

0.02

IRR = 2.75%

Year	Net Cash flows	Discount factor = Df = 1/(1+2.74616%)^Y	Present Values
Y	CF	Df	Df x Net Cash flows
0	-390,000.00	1.000000	-390,000.00
1	62,000.00	0.973272	60,342.89
2	62,000.00	0.947259	58,730.07
3	62,000.00	0.921941	57,160.35
4	62,000.00	0.897300	55,632.59
5	62,000.00	0.873317	54,145.66
6	62,000.00	0.849975	52,698.48
7	62,000.00	0.827258	51,289.98
IRR =	2.74616%	Total =	0.02