Question 1:

A company is evaluating a project that will require an investment of $21,500,000 and will generate the following cash flows:

Year 1: $3,700,000

Year 2: $4,900,000

Year 3: $8,700,000

Year 4: $9,300,000

Year 5: $11,500,000

Year 6: $12,000,000

The project can also be sold at the end of year 6 for $8,000,000.

For each of the below questions, please define your investment decision (invest or not to invest) and define the reason behind your decision.

1. Calculate the payback period of this investment opportunity;
2. Calculate the discounted payback period of this investment opportunity using a 20% discount rate;
3. Calculate the net present value of this investment opportunity assuming your required rate of return is 20% and 30%;
4. Calculate and interpret the IRR of this investment opportunity.

Question 2:

You want to invest in a project that costs initially $60 million. It has 50% chance to generate $5 million per year (pessimistic scenario) and 50% chance to generate $15 million per year (optimistic scenario).

1. What is the NPV of this investment if you have set a 20% required rate under each of the two scenarios? Explain the outcome of your calculations.
2. If you have the option to expand into 4 locations if the project is successful, what would be the NPV of this investment opportunity?
3. What is your conclusion on this investment opportunity taking into account the option to expand and point b. above?