Suppose that a project has an immediate cost of $10 million and running costs of $1 million per year beginning at the end of a one-year construction period. At the end of this year, annual gross revenue from the project of $1.5 million per year is generated in perpetuity. (You may assume that the running costs and revenues accrue at the end of each year.) (a) Is the project profitable in a net present-value sense if the interest rate is 8%? (b) For what range of interest rates (nonnegative) is the present value of net revenues (including the immediate cost of $10 million) positive?
Suppose that a project has an immediate cost of $10 million and running costs of $1 million per year beginning at the end of a one-year construction period. At the end of this year, annual gross revenue from the project of $1.5 million per year is generated in perpetuity. (You may assume that the running costs and revenues accrue at the end of each year.) (a) Is the project profitable in a net present-value sense if the interest rate is 8%? (b) For what range of interest rates (nonnegative) is the present value of net revenues (including the immediate cost of $10 million) positive?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
![Suppose that a project has an immediate cost of
$10 million and running costs of $1 million per year
beginning at the end of a one-year construction
period. At the end of this year, annual gross
revenue from the project of $1.5 million per year is
generated in perpetuity. (You may assume that the
running costs and revenues accrue at the end of
each year.)
(a) Is the project profitable in a net present-value
sense if the interest rate is 8%?
(b) For what range of interest rates (nonnegative) is
the present value of net revenues (including the
immediate cost of $10 million) positive?](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fdd49b60e-9843-47a5-8b5d-3f3394f78711%2Ffd9085dc-8fef-4cab-a085-0bedbfa1264f%2F1ndvd5k_processed.jpeg&w=3840&q=75)
Transcribed Image Text:Suppose that a project has an immediate cost of
$10 million and running costs of $1 million per year
beginning at the end of a one-year construction
period. At the end of this year, annual gross
revenue from the project of $1.5 million per year is
generated in perpetuity. (You may assume that the
running costs and revenues accrue at the end of
each year.)
(a) Is the project profitable in a net present-value
sense if the interest rate is 8%?
(b) For what range of interest rates (nonnegative) is
the present value of net revenues (including the
immediate cost of $10 million) positive?
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