You're Dean Hodge and you are planning the future of Foster for the next 5 years. You can either renovate common spaces on the business school campus, which will help attract more students immediately after the renovation is complete, or you can buy specialized computer terminals for finance students, which will make the finance major more attractive. The terminals have lower initial cost but there is a mandatory licensing fee in year 3. All projected cash flows are in $ millions. The projects are mutually exclusive because of budget constraints. The discount rate the UW uses for all projects is 10%.

a. Compute the missing cash flow in year 3 for the Finance terminals project. [6] 

b. Which project should you invest in? Explain your answer and motivate your reasoning based on the information available. [5] 

c. Someone on your team points out that the Common spaces renovation will yield $1M of positive cash flows for another 6 years, through year 11. However, for the Finance terminals, the cash flows in years 6-11 look exactly like the cash flows in years 0-5. Does this information change your decision? Why or why not? [4] 

Transcribed Image Text:

IRR NPV Year: 0 1 2 3 4 5 Common spaces Finance terminals 20% 0.7908 -3 1 1 1 1 1 23% 0.6638 -2 1 1 ??? 1 1 IRR NPV Year: 0 1 2 3 4 5 Common spaces Finance terminals 20% 0.7908 -3 1 1 1 1 1 23% 0.6638 -2 1 1 ??? 1 1

Answer rating: 100% (QA)

Solution a To compute the missing cash flow in year 3 for the Finance terminals project we can use the formula for NPV NPV CFt 1it where CFt is the ca... View the full answer