Question
As a separate project (Project P), you are considering sponsoring a pavilion at the upcoming Worlds Fair. The pavilion would cost $800,000, and it is
As a separate project (Project P), you are considering sponsoring a pavilion at the upcoming Worlds Fair. The pavilion would cost $800,000, and it is expected to result in $5million of incremental cash inflows during its first 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 condi-tion. Thus, Project Ps expected net cash flows look like this (in millions of dollars): Year Net Cash Flows 0 $(0.8) 1 5.0 2 (5.0) The project is estimated to be of average risk, so its cost of capital is 10%. (1)What are normal and non-normal cash flows? (2)What is Project Ps NPV? What is its IRR? Its MIRR? (3)Draw Project Ps NPV profile. Does Project P have normal or non-normal cash flows? Should this project be accepted?
In an unrelated analysis, you have the opportunity to choose between the following two mutually exclusive projects: Expected Net Cash Flows Year Project S Project L 0 $(100,000) $(100,000) 1 60,000 33,500 2 60,000 33,500 3 33,500 4 33,500 The projects provide a necessary service, so whichever one is selected is expected to be repeated into the foreseeable future. Both projects have a 10% cost of capital. (1) What is each projects initial NPV? (2) What is each projects equivalent annual annuity?
You are also considering another project that has a physical life of 3 years; that is, the machinery will be totally worn out after 3 years. However, if the project were terminated prior to the end of 3 years, the machinery would have a positive salvage value. Here are the projects estimated cash flows: Initial Investment and End-of-Year Net Year Operating Cash Flows Salvage Value 0 $(5,000) $5,000 1 2,100 3,100 2 2,000 2,000 3 1,750 0 Using the 10% cost of capital, what is the projects NPV if it is operated for the full 3 years? Would the NPV change if the company planned to terminate the project at the end of Year 2? At the end of Year 1? What is the projects optimal (economic) life?
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