ON NPV QUESTIONS Q1. An softdrink company's warehouse is being planned. The estimated initial investment is Rs. 20,00,000. The estimated life of the facility is 15 years. The annual operation and maintenance cost is Rs. 1,50,000. Benefits in the first year are Rs. 6,00,000 and increase by Rs. 50,000 every year thereafter. Check whether the project is justified based on NPV Calculation by assuming an interest rate of 12%, compounded annually. Q2. Grand Banks Mining Inc. plans a project to strip mine a wilderness area. Setting up operations and initial digging will cost Rs. 50,00,000. The first year's operations are expected to be slow and net a positive cash flow of only Rs. 500,000. Then there will be four years of Rs. 20,00,000 cash flows after which the ore will run out. Closing the mine and restoring the environment in the sixth year will cost Rs. 10,00,000. million. Calculate the project's NPV at a cost of capital of 12% and the IRR to the nearest whole percent. Q3. A company expects to earn at least 18% on its investments. The cash inflows and outflows of two projects are given in the following table. Which of the two projects would you recommend purely on financial considerations? Project Alpha Year 0 1 2 3 4 5 6 7 Q4 Project Beta Inflow 0 60,000 1,60,000 2,60,000 2,60,000 2,00,000 1,90,000 1,30,000 Outflow 3,00,000 1,20,000 0 60,000 0 60,000 0 40,000 Year 0 1 2 3 4 5 6 7 Inflow 0 0 1,60,000 2,30,000 2,25,000 2,15,000 2,00,000 1,10,000 Outflow 2,35,000 2,00,000 0 40,000 0 40,000 0 40,000 Due to increased demand, the management of Rani Beverage Company is considering to purchase a new equipment to increase the production and revenues. The useful life of the equipment is 10 years and the company's maximum desired payback period is 4 years. The inflow and outflow of cash associated with the new equipment is given below: The initial cost of equipment $37,500 Annual cash inflow: Sales $75,000 Annual cash outflow: Cost of ingredients $45,000 Salaries expenses $13,500 Maintenance expenses $1,500 Non cash expenses: Depreciation $5,000 Required: Should Rani Beverage Company purchase the new equipment? Use payback method for your answer. Q5 A state government is planning a hydroelectric project for a river basin. In addition to the production of electric power, this project will provide flood control, irrigation and recreation benefits. The estimated benefits and costs that are expected to be derived from this project are as follows: Initial cost = Rs. 8, 00, 00,000 Annual power sales = Rs. 60, 00,000 Annual flood control savings = Rs. 30, 00,000 Annual irrigation benefits = Rs. 50, 00,000 Annual recreation benefits = Rs. 20, 00,000 Annual operating and maintenance costs = Rs. 30, 00,000 Life of the project = 50 years Check whether the state government should implement the project (Assume i = 12%)