Please show all work for all questions.
Problem 1: Cost of plant $100 million up front. Profits of $30million at the end of every year.
Calculate the NPV if the cost of capital is 8%. Should you take the investment? Calculate the IRR and use it to determine the maximum deviation allowable in the cost of capital estimate to leave the decision unchanged.
Problem 2: Upfront costs $5 million. Profits expected $1million for 10 yrs. The company will provide support expected to cost $100,000/year in perpetuity. Assume all profits and expenses occur at end of yr.
What is the NPV if cost of capital is 6%? Should firm take project? Repeat for discount rates of 2% and 12%.
How many IRRs does this investment opportunity have?
Can the IRR rule be used to evaluate this investment? Explain.
Problem 3: Please choose between 2 projects:
Year end Cash Flow ($thousands)
Project 0 1 2 IRR
Playhouse -30 15 20 10.4%
Fort -80 39 52 8.6%
You can undertake only one project. If your cost of capital is 8% use the incremental IRR rule to make the correct decision.