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
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
So Polaris must earn =$16776.28 on these new projects