Suppose an opportunity arises to invest $10 million that will pay $5 million at the end of year 1 and $6.5 million at the end of year two. The cost of capital is 10%. Suppose an opportunity arises to invest $10 million that will pay $5 million at the end of year 1 and $6.5 million at the end of year two. The cost of capital is 10%.

a. Find NPV. Is the project a go? Show the formula and explain. You may use a financial calculator but show the formula as in my examples.

NPV = -$10M + $5M / (1 +10%) + $6.5M / (1 + 10%)^2

= -$10M + $4.545M + $5.144M

= -$472,000 Since the NPV is negative, this project shouldn't be implemented.

b. Suppose the project's cash flows are delayed a year, but not the outlay. How does that change your answer? Show and explain

c. Suppose there is a cost overrun of 10%. The cash flows and their timing are the same as in part a. How does this change your answer? Show and explain.

d. Suppose the second-year cash flow decreases to $6 million. The outlay and timing of the cash flows are the same as in part a. How does this change your answer? Show and explain.

e. Evaluate the proposal. Would you undertake it? Note, you have to decide what to do before b-d occur.

Answer rating: 100% (QA)

If the projects cash flows are delayed by a year but not the outlay the formula for NPV would remain ... View the full answer