Abbott Mining Systems wants to determine whether it should upgrade a piece of equipmentused in deep mining operations in one of its international operations now or later. If the com-pany selects plan A, the upgrade will be purchased now for $200,000. However, if the com-pany selects plan 1, the purchase will be deferred for 3 years when the cost is expected to riseto $300,000. Abbott is ambitious; it expects a real MARR of 12% per year. The inflation ratein the country has averaged 3% per year. From only an economic perspective, determinewhether the company should purchase now or later (a) when inflation is not considered and(b) when inflation is considered.

Future value refers to the current value of an asset that will be present at some future date after…

Answered: Abbott Mining Systems wants to…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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U.S. Steel is considering a plant expansion to produce austenitic, precipitation hardened, duplex, and martensitic stainless steel round bars that is expected to cost $14 million now and another $10 million 1 year from now. If total operating costs will be $1.3 million per year starting 1 year from now, and the estimated salvage value of the plant is virtually zero, how much must the company make annually in years 1 through 9 to recover its investment plus a return of 23% per year? The company must make $ 7.560 million annually in years 1 through 9 to recover its investment plus a return of 23% per year
The Northern Investment Group is considering investing $2.5 million in a new shopping plaza in Atlanta. The company has estimated that the shopping plaza, once built, will generate $500,000 per year for 10 years. If the firm is looking for a return of 12% on its investment, is it worth undertaking? Assume that the shopping plaza will retain about 60% of its initial investment as salvage value.
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A mining company is considering a new project. Because the mine has received a permit, the project would be legal; but it would cause significant harm to a nearby river. The firm could spend an additional $10 million at Year 0 to mitigate the environmental Problem, but it would not be required to do so. Developing the mine (without mitigation) would cost $60 million, and the expected cash inflows would be $20 million per year for 5 years. If the firm does invest in mitigation, the annual inflows would be $21 million. The risk-adjusted WACC is 10%. Calculate the NPV and IRR with mitigation. Round your answers to two decimal places. Do not round your intermediate calculations. Enter your answer for NPV in millions. For example, an answer of $10,550,000 should be entered as 10.55.NPV $ millionIRR % Calculate the NPV and IRR without mitigation. Round your answers to two decimal places. Do not round your intermediate calculations. Enter your answer for NPV in millions. For example, an…
There are two alternative projects for an expansion of a company's product lines: The first option is a high-quality offer that costs $4,000,000. The expected cash inflow to the firm is estimated to be $900,000 per year after depreciation and tax. The life of this project is 12 years. The second option costs $7,000,000 with a life span of 9 years. The cash inflow to the firm from this option is estimated to be $1,600,000 per annum, again after depreciation and tax. This company has a cost of capital of 13% a) Calculate the Internal Rate of Return (IRR), Profitability Index (PI) and Payback period for both options. b) Can NPV be used to rank the projects? If not, what should you do? Explain fully which project should be chosen. c) What are some of the advantages that are associated with the use of the NPV in analysing projects?
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