Question
As a separate project (Project P), the firm is considering sponsoring a pavilion at the upcoming Worlds Fair. The Pavilion would cost $900,000, and it
As a separate project (Project P), the firm is considering sponsoring a pavilion at the upcoming Worlds Fair. The Pavilion would cost $900,000, and it is expected to result in $5.5 million of incremental cash inflows during its 1 year of operation. However, it would then take another year, and $5 million of costs, to demolish the site and return it to its original condition. Thus, Project Ps expected net cash flows look like this (in millions of dollars):
Year 0 1 2
Year | Net Cash Flows |
0 | ($0.9) |
1 | 5.5 |
2 | (5.0) |
The project is estimated to be of average risk, so its cost of capital is 10 percent.
(1) What is Project Ps NPV? What is its MIRR?
(2) Does Project P have normal or non-normal cash flows? Should this project be accepted?
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