Capital Budgeting Practice Answers(2)(1).doc

# Capital Budgeting Practice Answers(2)(1).doc - [Type text 1...

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[Type text] 1. Today, Columbia Construction, Inc. will make an offer to acquire a gravel production site. The site is expected to provide net revenues of \$50,000 per year for forty years. Eleven years into the project, the firm will need to replace its screening drums at a cost of \$11,000. At the end of forty years the site will have no useful value and must be made ecologically sound at an expected cost of \$216,000. Assume the relevant interest rate is 6%. a. What is the maximum price the firm will offer? b. Use the NPV technique to determine if the firm should be willing to pay \$705,737 for the pit. c. Use the IRR technique to determine if the firm should be willing to pay \$705,737 for the pit. Max Price : \$752,314.85 – PV of \$11,000 – PV of 216,000 = \$725,520.20 NPV = PV of Inflows minus PV of Outflows/Costs = \$19,783.31 (This is from cash-flow keys. Answer was \$1 lower using the TVM keys.) IRR using Cash-flow keys – 6.23% IRR using TVM Keys – 6.21% ( Not recommended for problems with a non-constant payment stream.) 2.
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• Spring '13

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