Project #68686 - capital budgeting

Consider the following proposed plant.  The initial cost is $208 mm; however, ten (10) years after initiation, there will be a need for a major, one time only, overhaul which will cost $20 mm.  The life of the plant is considered to be infinite and the first net benefit of $13 mm is to be collected one year after the project is undertaken.  During the life of the plant, the yearly net cash benefits are expected to grow at the rate of three (3) percent per year.  Please ignore taxes and depreciation.

 

 

a) If the ten (10) year overhaul is considered an extra expense and not part of the “normal” net 

 cash benefit, will there be a positive or negative cash flow in year ten (10) when the overhaul 

 expense is included in the calculation?  Please show your work.

 

 

 

 

 

 

 

b) Using what you know about perpetuities, please set-up the equation that could be used to 

 calculate the IRR of this plant project.

 

 

 

 

 

 

 

c) If you were asked to solve the equation you gave as your answer to part b), what concern would 

      or should you have?         [Hint: Consider your answer to part a).]

 

 

 

 

 

 

 

d) Given an appropriate discount rate of nine (9) percent, is this project acceptable?  Please show 

      your work.

Subject Business
Due By (Pacific Time) 04/27/2015 11:00 pm
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