Question 2 (30 points):

Consider the following cash flow for an investment: Year 0 1 2 3 4 5 6 L = 10,000 C=-15,000 E = 15,000 C=-10,000 I=9,000 I=9,000 I=9,000 I=9,000 I=9,000 I=9,000 C: Investment Costs, I: Income, L: Salvage Value, E: Environmental Remediation Cost For a minimum ROR (i*) of 7.50 %, evaluate the sensitivity of the projects NPV using Sensitivity Analysis (OVAT Analysis). The range of the input data are

: a) Year 0 Cost (+/- 5%): i.e., -$14,250, -$15,000, and -$15,750 b) Year 1 Cost (+/- 10%) for year 1 cost: i.e., -$9,000, -$10,000, and -$11,000 c) Incomes (+/-15%): i.e., $7,650, $9,000, and $10,350 d) Salvage value (+/-20%): i.e., $8,000, $10,000, and $12,000

e) Environmental Cost (+/- 20%), i.e., -$12,000, -$15,000, and -$18,000

f) Plot the tornado diagram with respect to the results from Parts a) through

e) g) Rank the five uncertain inputs (two escalation rates, initial investment, salvage value, and remediation cost) based on the NPV sensitivity analysis

Question 3 (20 points):

An investment project requires investment costs of -$125,000 at the present time and an additional investment of -$75,000 at year 1. There are three possible outcomes for this project: 10% probability of success, which yields: annual income of $80,000 from year 2 to year 10 with annual operating expenses (OPEX) of -$7,500 for year 2 through year 10, with a salvage value of $25,000 and with environmental remediation cost of -$50,000 at the end of the project in year 10. 55% probability of success, which yields: annual income of $70,000 from year 2 to year 7, with annual operating expenses (OPEX) of $7,500 for year 2 through year 7, with annual environmental Page 2 of 2 remediation costs of -$5,000 from year 2 to year 7, and a salvage value of $15,000 at the end of year 7. 35% probability of failure: zero income for all the years and salvage value of $100,000 at the end of year 2 with no environmental remediation costs. Calculate the ENPV and conclude if this is a good investment, considering the minimum rate of return (discount rate) of 12.5%.