Info

$ 10,000

12.5%

a. Estimate the NPV of this project. Would you take this project?

b. Estimate the IRR of this project. How would you use the IRR to decide whether to take this project or not?

18. Barring the case of multiple internal rates of return, is it possible for the net present value of a project to be positive, while the internal rate of return is less than the discount rate. Explain.

19. You are helping a manufacturing firm decide whether it should invest in a new plant. The initial investment is expected to be $ 50 million, and the plant is expected to generate after-tax cashflows of $ 5 million a year for the next 20 years. There will be an additional investment of $ 20 million needed to upgrade the plant in 10 years. If the discount rate is 10%, a. Estimate the Net Present Value of the project.

b. Prepare a Net Present Value Profile for this project.

c. Estimate the Internal Rate of Return for this project. Is there any aspect of the cashflows that may prove to be a problem for calculating IRR?

20. You have been asked to analyze a project, where the analyst has estimated the return on capital to be 37% over the ten-year lifetime of the project. While the cost of capital is only 12%, you have concerns about using the return on capital as an investment decision rule. Would it make a difference if you knew that the project was employing an accelerated depreciation method to compute depreciation? Why?

21. Accounting rates of return are based upon accounting income and book value of investment, whereas internal rates of return are based upon cashflows and take into account the time value of money. Under what conditions will the two approaches give you similar estimates?

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