407 Homework 1

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EPOM 407
1.

Homework 1

Due 9/2/2014

Types of investment projects and decisions:
For each of the scenarios that follow, define whether the project is a profit-enhancing, cost-control, or publicimprovement program. If possible, define the scenario further as an expansion, replacement, or abandonment decision. a) Kia Motors, a unit of Hyundai Motor Co., of South Korea announced that it would invest EUR 1.1 billion to build an automobile-manufacturing plant in Zilina, Slovakia. The plant is expected to enter operation in
2006 with a capacity of 300,000 units.
b) BP said it would invest $1 billion through 2010 to upgrade process control systems and maintenance procedures at its Texas City refinery, where an explosion in 2005 killed 15 and
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Assume end-of-year cash flows (250 production days per year) and draw the cash flow diagram for Devon Energy's investment.
(h) Redraw the previous cash flow diagram, assuming continuous cash flows for oil production and sales.
(i) Horizon Air signed an agreement to purchase 12 Q400 turboprop aircraft from Bombardier at the total cost of $294 million. Assume that the jets fly, on average, three legs per day at 60% capacity (the aircraft seats

70 people), with each seat generating a net revenue (revenues minus costs of operation) of $35. Aggregate the net revenues to monthly figures (30 days per month) and generate a five-year cash flow diagram, assuming that the planes are sold at the end of five years for 40% of their initial worth.
(j) Adjust your solution to the previous problem, assuming that filled capacity grows 10% per year (but the same for all months in the same year), starting at 40% in year l.
3.

Cash Flow Tables and Spreadsheet:
a. Crystallex International Corp announced a $153 million investment to double the capacity of its gold mine at Las Cristinas, Venezuela. The investment will allow 20,000 metric tons of additional ore to be mined daily, yielding 1.27 grams (0.448 ounce) of gold per ton of ore. Assume that the investment is divided over two years, with the first year of production reaching 5,000 tons per day (200 production-days per year), and increasing 5,000 tons per day
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