7.15 A project to extend canals for vegetable crop irri- gation into an area that was recently cleared of Mesquite trees (a nuisance tree in Texas) and large weeds is projected to have a capital cost of $2,000,000. Annual maintenance and operation costs will be $100,000 per year. Annual favorable consequences to the general public of $820,000 per year will be offset to some extent by annual adverse consequences of $400,000 to a portion of the general public. If the project is assumed to have a 20-year life, what is the conventional B/C ratio at an interest rate of 8% per year? ? 7

The Ulmer Uranium Company is deciding whether or not to open a strip mine whose net cost is $4.4 million. Net cash inflows are expected to be $27.7 million, all coming at the end of Year 1. The land must be returned to its natural state at a cost of $25 million, payable at the end of Year 2. Plot the project’s NPV profile. Should the project be accepted if r = 8%? If r = 14%? Explain your reasoning. Can you think of some other capital budgeting situations in which negative cash flows during or at the end of the project’s life might lead to multiple IRRs? What is the project’s MIRR at r = 8%? At r = 14%? Does the MIRR method lead to the same accept-reject decision as the NPV method?

Washington-Pacific (W-P) invested $4 million to buy a tract of land and plant some young pine trees. The trees can be harvested in 10 years, at which time W-P plans to sell the forest at an expected price of $8 million. What is W-P’s expected rate of return?

A project requires an immediate investment of $10,000 for the purchase and installation of equipment.  The project is expected to generate after-tax cashflows in the amount of $3,000 at the end of each of the next five years.  What is the IRR?  [Select the best answer, please.]  11 %   13 %   15 %   18 %   20 %