Please solve and explain:

After paying $3 million for a feasibility study, Stanley wrote a proposal with the following cash flow estimates for a 25-year capital project. Equipment cost: $34 million, Shipping costs: $1 million, Installation: $19 million, Salvage: $4, Working capital investment: $2 million, Revenues are expected to increase by $20 million per year and cash operating expenses by $9 million per year. The firms marginal tax rate is 40 percent, its weighted average cost of capital is 9%, and the firm requires a 3 year payback. Assume conventional straight line depreciation.

Evaluate the project using NPV, IRR, PI, and PB.

Answer:

IO = $56 million

D = $2.16 million

NCF1-25 = $7.464 million

NCF25 = $4.4 million

NPV = $17.826 million > 0, so Accept

IRR = 12.71% > 9%, so Accept

PI = 1.32 > 1, so Accept

PB = 7.50 years > 3 so Reject

ACCEPT the project; PB can lead to wrong decisions