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