Question 1: Cellular Access, Inc. is a cellular telephone service provider that reported net income of $250 million for the most recent fiscal year. The firm had depreciation expenses of $100 million, capital expenditures of $200 million, and no interest expenses. Working capital increased by $10 million. Calculate the free cash flow for Cellular Access for the most recent fiscal year.
Question 2: You have been offered a very long term investment opportunity to increase your money one hundredfold. You can invest $100 today and expect to receive $100,000 in 40 years. Your cost of capital for this (very risky) opportunity is 25%. What does the IRR say about whether the investment should be undertaken? What about the NPB rule? Do they agree?
Question 3: You are considering constructing a new plant in a remote wilderness area to process the ore from a planned mining operation. You anticipate that the plant will take a year to build and cost $100 million upfront. Once built, it will generate cash flows of $15 million at the end of every year over the life of the plant. The plant will be useless 20 years after its completion once the mine runs out of ore. At that point you expect to pay $200 million to shut the plant down and restore the area to its pristine state. Using cost of capital of 12%,
a. What is the NPV of the project?
b. Is using the IRR rule reliable for this project? Explain
c. What are the IRR's of this project?