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Irving Ship Building is planning a major expansion of its present production facility. The total cost of the project is estimated at $ 2 0

Irving Ship Building is planning a major expansion of its present production facility. The total cost of
the project is estimated at $20 million over the next seven years. Of this, $4 million is to be spent in
the first year, $3 million in the second, $2 million in each of the third, fourth, fifth, and sixth years,
and $5 million in the seventh year.
(a) Assuming that all expenditures occur at the end of the year, and Irvings discount rate is 15%,
what is the present value of the cost of this project? (5 marks)
(b) If revenues for the project are expected to start in year 3 at $1 million, then increase to $2 million
for year 4, $3 million for year 5, and $4 million for years 6 and 7. Would you approve the project
given the 15% internal rate of return and seven-year return period?
(c) Would your conclusion change if the time horizon was shortened to an eight-year term (assume
there are no costs in year 8, and revenues continue at $4 million)?

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