(10-7) Your division is considering two investment projects, each of which requires an up-front

expenditure of $15 million. You estimate that the investments will produce the following

net cash flows:

Year Project A Project B

1 $5,000,000 $20,000,000

2 10,000,000 10,000,000

3 20,000,000 6,000,000

a. What are the two projects net present values, assuming the cost of capital is 5%?

10%? 15%?

b. What are the two projects IRRs at these same costs of capital?

(10-9) Davis Industries must choose between a gas-powered and an electric-powered forklift

truck for moving materials in its factory. Because both forklifts perform the same

function, the firm will choose only one. (They are mutually exclusive investments.) The

electric-powered truck will cost more, but it will be less expensive to operate; it will cost

$22,000, whereas the gas-powered truck will cost $17,500. The cost of capital that applies

to both investments is 12%. The life for both types of truck is estimated to be 6 years,

during which time the net cash flows for the electric-powered truck will be $6,290 per year

and those for the gas-powered truck will be $5,000 per year. Annual net cash flows include

depreciation expenses. Calculate the NPV and IRR for each type of truck, and decide

which to recommend.

(10-12) After discovering a new gold vein in the Colorado mountains, CTC Mining Corporation

must decide whether to go ahead and develop the deposit. The most cost-effective method of

mining gold is sulfuric acid extraction, a process that could result in environmental damage.

Before proceeding with the extraction, CTC must spend $900,000 for new mining equipment

and pay $165,000 for its installation. The gold mined will net the firm an estimated $350,000

each year for the 5-year life of the vein. CTCs cost of capital is 14%. For the purposes of this

problem, assume that the cash inflows occur at the end of the year.

a. What are the projects NPV and IRR?

b. Should this project be undertaken if environmental impacts were not a consideration?

c. How should environmental effects be considered when evaluating this, or any other,

project? How might these concepts affect the decision in part b?