Question
8. A project that costs $3,000 to install will provide annual cash flows of $800 for each of the next 6 years. a) What is
8. A project that costs $3,000 to install will provide annual cash flows of $800 for each of the next 6 years. a) What is its NPV if the firms required rate of return is 10%? b) How high can the discount rate be before you would reject the project?
9. A proposed nuclear power plant will cost $2.2 billion to build and then will produce cash flows of $300 million a year for 15 years. In addition, it must be decommissioned at a cost of $900 million at the end of Year 15.
a) What is the projects NPV if the firms required rate of return is 5%? Would you accept it?
b) What if the firms required rate of return is 18%, would you accept it?
10. If you insulate your office for $10,000, you will save $1,000 a year in heating expenses forever.
a) What is the payback period for this investment? Would you accept it if the cutoff period is 8 years?
b) What is the NPV of this investment when the cost of capital is 8%? Would you approve the insulation of your office?
c) What is the NPV of this investment when the cost of capital is 10%? Would you approve the insulation of your office?
d) What is the investments IRR?
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