Question: Eastern Electric is considering a project that has an up-front cost (at t = 0) of $150 million. The project is expected to generate positive
Eastern Electric is considering a project that has an up-front cost (at t = 0) of $150 million.
The project is expected to generate positive cash flows of $800 million and $175 million at the end of Years 1 and 2, respectively. After the project is completed, the company expects to pay a cost of $900 million at t = 3 to clean up the land that is used for the project.
a. Plot the project's NPV profile. Calculate the project's NPV at k = 0%, 3%, 5%, 6%, 10%, 100%, 400%, 430%, and 450%.
b. Using the NPV profile drawn in part a, estimate the project's two IRRs.
c. Should the project be accepted at k = 5%? If k = 10%? Explain your reasoning.
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