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Consider a firm that grows peanuts specifically for an ice-cream manufacturing firm. It is considering building a greenhouse that would allow for...

Consider a firm that grows peanuts specifically for an ice-cream manufacturing firm. It is considering building a greenhouse that would allow for year-round growth of peanuts, in addition to an increase in the taste of the product. The greenhouse is expected to cost $4 million and is expected to generate the following cash flows over a five-year useful life:



Year
One
Two
Three
Four
Five

Cash Flow
$400,000
$1,400,000
$1,800,000
$2,000,000
$2,200,000






A. Determine the Net Present Value of the greenhouse if the required return is 7%.

B. Determine the Internal Rate of Return of the greenhouse.

C. Discuss the reasons that the NPV method and the IRR method agree with each other on the acceptability of the greenhouse.

D. Discuss the reasons that NPV method is considered to be superior to the IRR method.
Consider a firm that grows peanuts specifically for an ice-cream manufacturing firm. It is considering building a greenhouse that would allow for year-round growth of peanuts, in addition to an increase in the taste of the product. The greenhouse is expected to cost $4 million and is expected to generate the following cash flows over a five-year useful life: Year One Two Three Four Five Cash Flow $400,000 $1,400,000 $1,800,000 $2,000,000 $2,200,000 A. Determine the Net Present Value of the greenhouse if the required return is 7%. B. Determine the Internal Rate of Return of the greenhouse. C. Discuss the reasons that the NPV method and the IRR method agree with each other on the acceptability of the greenhouse. D. Discuss the reasons that NPV method is considered to be superior to the IRR method.
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Finance - 8235367.xls

Year
0
1
2
3
4
5 CF
-4,000,000
400,000
1,400,000
1,800,000
2,000,000
2,200,000 a) NPV = 2160342.19 b) IRR = c) The reasons are:- 1) NPV is positive. 2) IRR is greater than required return. d) The...

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