The following set-up pertains to the next two questions:
BMW is evaluating a new 200 series. it had already incurred $20 million to research the project and found the below details. BMW has to build a factory that costs $760 million. the factory is to be built on a piece of land BMW bought 5 years ago for $65 million that also includes an old building. At its current situation the land is valued at $620 million. In addition, the company is planning to remove the building and build the new factory instead. removing the factory and cleaning the land will cost $16 million. the cash for the initial investment is already invested at riskless government securities at 4% annual rate. 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 15% 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 cat up from the sales of the other models, especially the 300 series. The anticipated effect is a reduction of about $20 million is annual cash flows in the coming 5 years.
1) what is the cost of the initial investment (in millions)?
a- $1,396.00
b- $1,568.00
c- $1,568.00
d- $1,716.00
e- $1,591.00
2) What is the IRR of the project and should you take it? (assume initial cost $1200 million)
a- the annual IRR is 9.59% and the investment does create wealth for the company
b- the annual IRR is 9.59% and the investment does not create wealth for the company
c- the annual IRR is 12.35% and the investment does create wealth for the company
d- the annual IRR is 12.35% and the investment does not create wealth for the company