Modenar Covac Limited (MCL) is assessing a project which requires an initial investment of \$234000. The project is expected to generate $24000 and $30000 at the end of the first year and the second year, respectively. After that, the project is expected to generate an annual cash flow of $47000 at the end of each year for four years. If MCL launches the project today, it will have an insight into an additional investment opportunity six years from now (at t = 6). Based on the best information available today, there is a 62% probability that the outlook will be favourable, in which case the future investment opportunity will require an additional investment of $59000 at year 6(t=6) and generate perpetual cash flows of $35000 per year from year 7 . In case of unfavourable outlook, the future investment opportunity will have a NPV of $70000 at t=6. The project's cost of capital is 15%. MCL does not have to make a decision now regarding whether the additional opportunity will be taken. Instead, the company can wait until the outlook is known, and decide at t=6 whether or not it wants to take this additional opportunity. However, it will not be able to take the future investment opportunity unless it makes an initial investment of $234000 million today (i.e., at t=0 ). QUESTIONS 1. Estimate the NPV of the project without consideration of the potential future opportunity. [3 marks] Project's NPV without consideration of the future opportunity (in $, round to two decimal places) = 2. What is the present value of the additional investment opportunity embedded in this project? [6 marks] NPV of the additional investment opportunity valued at t=6 (in $, round to two decimal places) = Present value (i.e., at t=0) of the additional investment opportunity (in \$, round to two decimal places)= 3. What is the NPV of the project after consideration of the potential future opportunity. [1 marks] Project's NPV after consideration of the future opportunity (in $, round to two decimal places) = [Total: 10 marks] Modenar Covac Limited (MCL) is assessing a project which requires an initial investment of \$234000. The project is expected to generate $24000 and $30000 at the end of the first year and the second year, respectively. After that, the project is expected to generate an annual cash flow of $47000 at the end of each year for four years. If MCL launches the project today, it will have an insight into an additional investment opportunity six years from now (at t = 6). Based on the best information available today, there is a 62% probability that the outlook will be favourable, in which case the future investment opportunity will require an additional investment of $59000 at year 6(t=6) and generate perpetual cash flows of $35000 per year from year 7 . In case of unfavourable outlook, the future investment opportunity will have a NPV of $70000 at t=6. The project's cost of capital is 15%. MCL does not have to make a decision now regarding whether the additional opportunity will be taken. Instead, the company can wait until the outlook is known, and decide at t=6 whether or not it wants to take this additional opportunity. However, it will not be able to take the future investment opportunity unless it makes an initial investment of $234000 million today (i.e., at t=0 ). QUESTIONS 1. Estimate the NPV of the project without consideration of the potential future opportunity. [3 marks] Project's NPV without consideration of the future opportunity (in $, round to two decimal places) = 2. What is the present value of the additional investment opportunity embedded in this project? [6 marks] NPV of the additional investment opportunity valued at t=6 (in $, round to two decimal places) = Present value (i.e., at t=0) of the additional investment opportunity (in \$, round to two decimal places)= 3. What is the NPV of the project after consideration of the potential future opportunity. [1 marks] Project's NPV after consideration of the future opportunity (in $, round to two decimal places) = [Total: 10 marks]
