Finance (Capital Budgeting)

Pls. read the case 20 Fort Greenwold

QUESTIONS

1.a) Calculate the NPV net present value of modernizing the exisiting paper mill

1.b) Calculate the NPV of building a new paper mill

2.a) Calculate the IRR of each investment

2.b) Calculate the payback of each

3.a) Do the NPV and IRR methods give the same accept / reject signals? Explain why the NPV and IRR methods can give divergen signals when evaluatin mutually exclusive alternatives.

4. Suppose that the appropriate life of a modernized factory is 15 years instead of 20.Evaluate the argument that assuming a 20-year time horizon for this project adds 40 634 680 USD times 5 or 203 173 400 USD to the yearly cash flows.

5. Based on your calculations ins the previous questoins an information in the case, what decision do you recommend? Justify your choice.

6.a) Building a new mill requires 464,1 Million USD more than modernizing the old mill but will generate an extra 67 093 320 USD in yearly cash flow. Calculate the IRR on this incremental expenditure. Compare your answers to the 12 % required rate of return.

6.b) Based on you answer in part a), suggest a decision rule for the IRR in evaluating mutually exclusive alternatives with different initial costs.