tutorial 5,6,7 (1)

tutorial 5,6,7 (1) - Capital Budgeting Problems [1] Two...

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Topic 5 NPV Rule 1. Your factory has been offered a contract to produce a part for a new printer. The contract would last for three years and your cash flows from the contract would be $5mil per year. Your upfront setup costs to be ready to produce the part would be $8mil. Your discount rate for this contract is 8%. a. What does the NPV rule say you should do? b. If you take the contract, what will be the change in the value of your firm? 2. You are considering opening a new plant. The plant will cost $100mil upfront and will take one year to build. After that, it is expected to produce profits of $30 mil at the end of every year of production. The cash flows are expected to last forever. Calculate NPV of this investment opportunity if your cost of capital is 8%. Should you make the investment? Calculate IRR and use it to determine the maximum deviation allowable in the cost of capital estimate to leave the decision unchanged? 3. OpenSeas, Inc. is evaluating the purchase of a new cruise ship. The ship would cost $500 mil, but would operate for 20 years. OpenSeas expects annual cash flows from operating the ship to be $70mil and its cost of capital is 12%. a. Prepare an NPV profile of the purchase. b. Identify the IRR on the graph. c. Should OpenSeas go ahead with the purchase? d. How far off would OpenSeas’ cost of capital be before your purchase decision would change? Alternative Decision 4. You are a real estate agent thinking of placing a sign advertising your services at a local bus stop. The sign will cost $5000 and will generate additional revenue of $500 per month. What is the payback period? 5.
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tutorial 5,6,7 (1) - Capital Budgeting Problems [1] Two...

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