ANSWER NUMBER 1 ONLY - consider the answer and solution of #2

1. Would you dare to loan the capital needed in item 1 from a Chinese bank offering 12% interest rate for seven-year payment (25 pts)? Why? Note: Decide by comparing annual payment vs annual net income
2. You are hired by a group of investors as a consultant to recommend whether or not they will fund a mining and infrastructure project that needs a capitalization of US$120,000,000.00 for a 7-year operation at a projected profit (after tax) of US$30,000,000.00 per annum. Assuming a 10% discount rate, would you recommend investing or not? Why? What is the NPV What is the estimated IRR at seven years? What is the payback period in terms of number of years.

NPV = Present value of cash inflows- initial investment.

Here investment = 1200,000,00

Project life 7 years.

Annual cash flow = 30,000,000

Discount rate =10%

PV of cash inflows = cash flow x Pv of annuity factor

PVAF for 7 year, 10% rate = 4.86842

= 30,000,000x4.86842=146052600

NPV =146052600-120, 000,000=26052600

As the NPV is positive, then the project should be accepted.

IRR or internal rate of return is the rate at which present value of cash flows becomes equal to investment, i;e where NPV is zero. Here at 10% rate we have calculated the NPV, so we will try a higher discount rate suppose 20%.

NPV at 20%:-

PV of annuity at 7 year, 20% = 3.60459

PV of cash flows =30,000,000x3.60459=108137700

Here NPV =108137700-120, 000000=-11862300

So NPV is negative, so we will apply the IRR formula:-

IRR = lower rate +(higher-lower rate) x pV at lower rate - required PV / PV at lower rate - PV at higher rate

=10%+(20-10%) x 146052600-120,000000/146052600-108137700

= 10%+ (10% x 0.687)

=10%+ 6.87= 16.87%

So IRR = 16.87%

payback period = initial investment /annual cash flow

, = 120,000,000/30, 000,000= 4 years.