1. (6 marks) A firm is considering three independent projects. They all required the same initial...

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1. (6 marks) A firm is considering three independent projects. They all required the same initial investment of $110,000 and have no residual value after eight years. All three generate the same aggregate total of profits ($160,000), but the profits are distributed over the eight-year period, as presented in the following table. Year 1 2 3 4 5 6 7 8 Annual Project A($) 25,000 25,000 25,000 25,000 15,000 15,000 15,000 15,000 Profit Project B ($) 20,000 20,000 20,000 20,000 20,000 20,000 20,000 20,000 Project C($) 0 0 45,000 45,000 15,000 15,000 20,000 20,000 a) (2 marks) Rank the projects based on their IRRs. b) (2 marks) Rank the projects based on their NPVs if the firm's cost of capital is 9%? c) (2 marks) Which project should be accepted if the firm has a five-year payback requirement? 2. (4 marks) A mining company is considering whether to develop a mining property. It is estimated that an immediate expenditure of $7,500,000 will be needed to bring the property into production. Thereafter, the net cash inflow will be $1,400,000 at the end of each year for the next 10 years. An additional expenditure of $3,200,000 at the end of 11 years will have to be made to restore the property to environmental requirements. a) (2 marks) On projects of this type the company would expect to earn at least 9% compounded annually. Advise whether the company should proceed. (To prove the conclusion, you should show all calculations). b) (2 marks) What conclusion should be made if a desire rate is 11%? 1. (6 marks) A firm is considering three independent projects. They all required the same initial investment of $110,000 and have no residual value after eight years. All three generate the same aggregate total of profits ($160,000), but the profits are distributed over the eight-year period, as presented in the following table. Year 1 2 3 4 5 6 7 8 Annual Project A($) 25,000 25,000 25,000 25,000 15,000 15,000 15,000 15,000 Profit Project B ($) 20,000 20,000 20,000 20,000 20,000 20,000 20,000 20,000 Project C($) 0 0 45,000 45,000 15,000 15,000 20,000 20,000 a) (2 marks) Rank the projects based on their IRRs. b) (2 marks) Rank the projects based on their NPVs if the firm's cost of capital is 9%? c) (2 marks) Which project should be accepted if the firm has a five-year payback requirement? 2. (4 marks) A mining company is considering whether to develop a mining property. It is estimated that an immediate expenditure of $7,500,000 will be needed to bring the property into production. Thereafter, the net cash inflow will be $1,400,000 at the end of each year for the next 10 years. An additional expenditure of $3,200,000 at the end of 11 years will have to be made to restore the property to environmental requirements. a) (2 marks) On projects of this type the company would expect to earn at least 9% compounded annually. Advise whether the company should proceed. (To prove the conclusion, you should show all calculations). b) (2 marks) What conclusion should be made if a desire rate is 11%?

Answer rating: 100% (QA)

a To rank the projects based on their Internal Rate of Return IRR we need to calculate the IRR for each project and compare them Project A IRR Cash Fl... View the full answer