As a separate project (Project P), you are considering sponsorship of a pavilion at the upcoming Worlds
Question:
As a separate project (Project P), you are considering sponsorship of a pavilion at the upcoming World’s Fair. The pavilion would cost $800,000, and it is expected to result in $5 million of incremental cash inflows during its single 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):
The project is estimated to be of average risk, so its cost of capital is 10%.
(1) What are normal and nonnormal cash flows?
(2) What is Project P’s NPV? What is its IRR? Its MIRR?
(3) Draw Project P’s NPV profile. Does Project P have normal or nonnormal cash flows? Should this project be accepted?
Step by Step Answer:
Corporate Finance A Focused Approach
ISBN: 978-1439078082
4th Edition
Authors: Michael C. Ehrhardt, Eugene F. Brigham