You are planning to invest in a project which costs $40 million today. The project...
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You are planning to invest in a project which costs $40 million today. The project will produce returns of $4 million per year for five years and the scrap value will be $20 million. That is, you will receive $4 million at the end of the year, for each of the next five years, and you will receive $20 million at the end of the fifth year.
Question (a) [2 marks] What is the net present value of the project (in $ million) if the cost of capital is 20% per year? $ Answer million
Question (b) [1 mark] Hence or otherwise if the cost of capital is 20% per year, should you invest in the project? Answer. Now suppose that the cost of capital for the project is 12% per year for the first three years, and 4% per year for subsequent years.
Question (c) [2 marks] What is the net present value of the project (in $ million)? $Answer million
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