Oxbow Inc. is contemplating a new venture project and has done a detailed five year cash flow
Question:
Oxbow Inc. is contemplating a new venture project and has done a detailed five year cash flow estimate with the following result ($000):
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The firm€™s cost of capital is 12%.
a. Use a financial calculator to compute the project€™s NPV and IRR, and make the appropriate recommendation to management. (If you don€™t have a financial calculator just calculate NPV.)
b. Charles Dunn, Oxbow€™s Marketing VP, has argued that it€™s unreasonable to exclude cash flows past year five from the analysis. Calculate the project€™s terminal value assuming year five€™s cash flow goes on forever. Recalculate the project€™s NPV and IRR under that Charles€™ assumption.
c. Charles further argues that the most appropriate assumption is that cash flows beyond the fifth year incorporate a three percent long run growth rate. Calculate the terminal value, NPV, and IRR implied by this assumption.
d. Comment on the results implied by the use of aggressive terminal value assumptions.
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of...
Step by Step Answer:
a Using a financial calculator enter the following according to the ...View the full answer
