Question: Silkwood Power Company is considering two projects with the following predicted cash flows: Hydroelectric Upgrade Geothermal Upgrade Initial Investment CFs ($100,000) ($100,000)
End of year 1 CFs $20,000 $80,000
End of year 2 CFs $30,000 $40,000
End of year 3 CFs $40,000 $30,000
End of year 4 CFs $90,000 $10,000
Internal Rate of Return In the two cells above, enter the IRR function for the two projects. In the rows below, enter NPV functions for the two projects using the Discount Rates in Column A and the cash flows above. Discount Rates NPV Hydro NPV Geo
0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% 21% 22% 23% 24% 25% 26% 27% 28% 29% 30%
Answer these questions:
1. Which project(s) would be accepted if the company's cost of capital were 6%?
2. Which project(s) would be accepted if the company's cost of capital were 15%?
3. At what cost of capital would Silkwood value each project equally? (You can use an approximate answer here.)
4. At what cost of capital would the Hydro project become unacceptable? (Hint: Look at the IRR result.)
5. At what cost of capital would the Geo project become unacceptable? (Hint: Look at the IRR result.)