Problem 11-11

Oxbow Inc. is contemplating a new venture project and has done a detailed five-year cash flow estimate with the following result ($000):

C0	C1	C2	C3	C4	C5
(257)	(65)	60	90	140	185

The Firm's cost of capital is 12%.

1. Use a financial calculator to compute the project's NPV and IRR, and make the appropriate recommendation to management. Round NPV to three decimal places. Round IRR to one decimal place. Use a minus sign to indicate a negative NPV. Enter your answer in whole dollars and not in thousands of dollars. For example, an answer of $1 thousand should be entered as 1,000 not 1. Do not round your intermediate calculations.

   NPV	$
   IRR	%

2. Charles Dunn, Oxbow's Marketing VP, has argued that it's unreasonable to exclude cash flows past year 5 from the analysis. Calculate the project's terminal value assuming that year 5's cash flow goes on forever. Recalculate the project's NPV and IRR under Charles's assumption. Round NPV and terminal value to the nearest dollar. Round IRR to one decimal place. Enter your answer in whole dollars and not in thousands of dollars. For example, an answer of $1 thousand should be entered as 1,000 not 1. Do not round your intermediate calculations.

   Terminal value	$
   NPV	$
   IRR	%

3. Charles further argues that the most appropriate assumption is that cash flows beyond the fifth year incorporate a 3% long-run growth rate. Calculate the terminal value, NPV, and IRR implied by this assumption. Round NPV and terminal value to the nearest dollar. Round IRR to one decimal place. Enter your answer in whole dollars and not in thousands of dollars. For example, an answer of $1 thousand should be entered as 1,000 not 1. Do not round your intermediate calculations.

   Terminal value	$
   NPV	$
   IRR	%

8. Comment on the results implied by the use of aggressive terminal value assumptions. The input in the box below will not be graded, but may be reviewed and considered by your instructor.