G) As a separate project (Project P), the firm is considering sponsoring a pavilion at the upcoming World's Fair. The Pavilion would cost $900,000, and it is expected to result in $5.5 million of incremental cash inflows during its 1 year of operation. However, it would then take another year, and $5 million of costs, to demolish the site and return it to its original condition. Thus, Project P's expected net cash flows look like this (in millions of dollars): Year Net Cash Flows ($0.9) 5.5 2 (5.0) The project is estimated to be of average risk, so its cost of capital is 10 percent. (1) What is Project P's NPV? What is its MIRR? (2) Does Project P have normal or non-normal cash flows? Should this project be accepted?
G) As a separate project (Project P), the firm is considering sponsoring a pavilion at the upcoming World's Fair. The Pavilion would cost $900,000, and it is expected to result in $5.5 million of incremental cash inflows during its 1 year of operation. However, it would then take another year, and $5 million of costs, to demolish the site and return it to its original condition. Thus, Project P's expected net cash flows look like this (in millions of dollars): Year Net Cash Flows ($0.9) 5.5 2 (5.0) The project is estimated to be of average risk, so its cost of capital is 10 percent. (1) What is Project P's NPV? What is its MIRR? (2) Does Project P have normal or non-normal cash flows? Should this project be accepted?
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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Transcribed Image Text:G) As a separate project (Project P), the firm is considering sponsoring a pavilion at the upcoming
World's Fair. The Pavilion would cost $900,000, and it is expected to result in $5.5 million of
incremental cash inflows during its 1 year of operation. However, it would then take another
year, and $5 million of costs, to demolish the site and return it to its original condition. Thus,
Project P's expected net cash flows look like this (in millions of dollars):
Year
Net Cash Flows
($0.9)
5.5
2
(5.0)
The project is estimated to be of average risk, so its cost of capital is 10 percent.
(1) What is Project P's NPV? What is its MIRR?
(2) Does Project P have normal or non-normal cash flows? Should this project be accepted?
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