Corporate Finance Chapter 10 - Even Solutions

2951 Words Apr 21st, 2013 12 Pages
(10-2) IRR
A project has an initial cost of $52,125, expected net cash inflows of $12,000 per year for 8 years, and a cost of capital of 12%. What is the project’s NPV? (Hint: Begin by constructing a time line.) What’s the project’s IRR?
NPV = Cash Flow in Period n/ (1 + Discount Rate)n
NPV = $52,125 + 12,000/(1 +.12)8 = 4,846.60
12,000/(1 +.12)7 = 5,428.19
12,000/(1 +.12)6 = 6,079.58
12,000/(1 +.12)5 = 6,809.13
12,000/(1 +.12)4 = 7,626.21
12,000/(1 +.12)3 = 8,541.35
12,000/(1 +.12)2 = 9,566.33
12,000/(1 +.12)1 = 10,714.29
-52,125
Add each NPV to get NPV = $7,486.68
IRR in excel – CF0 = -52,125, CF1-8= 12,000, IRR = 16%

(10-4) Profitability Index
Refer to previous problem. What the project’s profitability index?
PI = 1 + NPV/Investment
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CTC’s cost of capital is 14%. For the purposes of this problem, assume that the cash inflows occur at the end of the year.
What are the project’s NPV and IRR?
NPV = -1,065,000 + 350,000 (1.14)1 + 350,000 /(1+.14)2 + 350,000 /(1+.14)3 + 350,000 /(1+.14)4 + 350,000 /(1+.14)5 = -1,065,000 + 307,017.5439 + 269,313.635 + 236,240.6685 + 207,228.1167 + 181,779.4652 = NPV = $136,578.43
IRR in excel = 19.22%

Should this project be undertaken if environmental impacts were not a consideration? Yes.

How should environmental effects be considered when evaluating this, or any other, project? How might these concepts affect the decision in part b?
There should be consideration as to whether there are steps that can reverse or minimize the environmental impact. For example, if trees must be taken down to mine in an area, can the same # of trees be planted when the project is finished? If the damage will be great and cannot be reversed or minimized, the decision may be not to proceed with a project even if it is profitable.

(10-14) Timing Differences
The Ewert Exploration Company is considering two mutually exclusive plans for extracting oil on property for which it has mineral rights. Both plans call for the expenditure of $10 million to drill development wells. Under Plan A, all the oil will be extracted in 1 year, producing a cash flow at t = 1 of $12 million; under Plan B, cash flows will be $1.75 million per year for 20 years.
a. What are the annual
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