Question
Marvel's Gold Mine, Inc .is evaluating whether to build a bridge that will take two years to complete, or to use a ferry that is
Marvel's Gold Mine, Inc .is evaluating whether to build a bridge that will take two years to complete, or to use a ferry that is available immediately, to transport gold across a river. Marvel's opportunity cost is 10%. The cost of each alternative project is as follows:
Bridge | Ferry | |
Investment Cost | $4,000,000 | $1,000,000 |
Annual Revenue | ||
Year 1 | $0 | $750,000 |
Year 2 | $0 | $750,000 |
Years 3-10 | $1,500,000 | $750,000 |
Annual Operating costs Years 1-10 | $250,000 | $100,000 |
Evaluate using the payback period, Net Present Value, and IRR all in Excel only, SHOW Equations
Be sure to discuss your choice of the preferred project, and why you choose it. In the absence of a specific rule, and given that the projects are mutually exclusive, how do you think the payback periods you calculate should be interpreted?
One of the key tips to this exercise is to draw a timeline first for each option, the bridge and the ferry. That will help dramatically with defining the cash flows in each period.
Also note that the operating expenses are EACH year; in the case of the Bridge project, even the years before the bridge is completed.
Use the Excel function +irr(values, guess) where values is a range of cash flows (i.e., your timeline!). Alternatively, most financial calculators allow you to input the individual cash flows and calculate an IRR.
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