You are analyzing a project with a thirty-year lifetime, with the following characteristics:
• The project will require an initial investment of $20 million and additional investments of $5 million in year 10 and $5 million in year 20.
• The project will generate earnings before interest and taxes of $3 million each year. (The tax rate is 40%.)
• The depreciation will amount to $500,000 each year, and the salvage value of the equipment will be equal to the remaining book value at the end of year 30.
• The cost of capital is 12.5%.
a. Estimate the NPV of this project.
b. Estimate the IRR on this project. What might be some of the problems in estimating the IRR for this project?