Zco is evaluating a new 100 series. It had already incurred $100 million to research the project and found the below details. The firm has to build a factory that costs $450 million. The factory is to be built on a piece of land the company bought 5 years ago for $65 million that also includes an old building. At its current situation the land is valued at $850 million. In addition, the company is planning to remove the building and build the new factory instead. Removing the building and cleaning the land will cost $50 million. Funds for the initial investment are already invested in treasury bills at an annual rate of 3.5%. The cash flow from selling the new model is expected to be over the next 5 years (in millions): 250, 200, 225, 250, 850 respectively. Typically, such projects generated 17% return but the company expects this project to generate above that rate. Further, the automotive industry enjoys a low risk premium of 5% over the risk free rate. Finally, the new model will eat up from the sales of the other models, especially the 500 series. The anticipated effect is about $20 million reduction in the annual net cash flows for the coming 5 years.The tax rate imposed on the firm is 20%.

1.What is the cost of the initial investment (in million)?

a. -1113

b. -1613

c. -2416

d. -946

e. -1193

2.What is the project's net present value (disregard your answer in the previous problem and assume initial investment to be 1000 millions)?

a. 93.33

b. 243.33

c. -148.63

d. -15.67

e. 143.33

3.What is the IRR of the project and should you take it?

a.The annual IRR is 15.51% and the investment does create wealth for the company.

b.The annual IRR is 15.51% and the investment does not create wealth for the company.

c.The annual IRR is 8.50% and the investment does not create wealth for the company.

d.The annual IRR is 9.59% and the investment does not create wealth for the company.

e.The annual IRR is 9.59% and the investment does create wealth for the company.