G) As a separate project (Project P), the firm is considering sponsoring a pavilion at the upcoming World's Fair. The Pavilion would cost $900,000, and it is expected to result in $5.5 million of incremental cash inflows during its 1 year of operation. However, it would then take another year, and $5 million of costs, to demolish the site and return it to its original condition. Thus, Project P's expected net cash flows look like this (in millions of dollars): Year Net Cash Flows ($0.9) 5.5 2 (5.0) The project is estimated to be of average risk, so its cost of capital is 10 percent. (1) What is Project P's NPV? What is its MIRR? (2) Does Project P have normal or non-normal cash flows? Should this project be accepted?

G) As a separate project (Project P), the firm is considering sponsoring a pavilion at the upcoming World's Fair. The Pavilion would cost $900,000, and it is expected to result in $5.5 million of incremental cash inflows during its 1 year of operation. However, it would then take another year, and $5 million of costs, to demolish the site and return it to its original condition. Thus, Project P's expected net cash flows look like this (in millions of dollars): Year Net Cash Flows ($0.9) 5.5 2 (5.0) The project is estimated to be of average risk, so its cost of capital is 10 percent. (1) What is Project P's NPV? What is its MIRR? (2) Does Project P have normal or non-normal cash flows? Should this project be accepted?

Financial Management: Theory & Practice

16th Edition

ISBN:9781337909730

Author:Brigham

Publisher:Brigham

Chapter10: The Basics Of Capital Budgeting: Evaluating Cash Flows

Section: Chapter Questions

Problem 10MC

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InterCell Company wants to participate in the upcoming World's Fair in Korea. To participate, the firm needs to spend $1.5 million in year 0 to develop a showcase. The showcase will produce a cash flow of $3.75 million at the end of year 1. Then at the end of year 2, $2.31 million must be expended to restore the land on which the showcase was presented to its original condition. Therefore, the project's expected net cash flows are as follows (in thousands of dollars): (a) Plot the present worth of this investment as a function of i.(b) Compute the i*s for this investment. Is this a pure investment?( c) Would you accept this investment at MARR= 14 % ?
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