The initial cost is $340 mm; however, five (5) years after initiation

jagguarpaw January 11, 2017 0 Comments

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Question: The initial cost is $340 mm; however, five (5) years after initiation

Plant Problem:

Consider the following proposed plant. The initial cost is $340 mm; however, five (5) years after initiation, there will be a need for a major, one time only, overhaul which will cost $28mm. The life of the plant is considered to be infinite and the first net benefit of $25mm is to be collected one year after the project is undertaken. During the life of the plant, the yearly net cash benefits are expected to grow at the rate of two (2) percent per year. Please ignore taxes and depreciation.

 

  1. a) If the five (5) year overhaul is considered an extra expense and not part of the “normal” net

Cash benefit, will there be a positive or negative cash flow in year five (5) when the overhaul

Expense is included in the calculation? Please show your work.

  1. b) Using what you know about perpetuities, please set-up the equation that could be used to

Calculate the IRR of this plant project.

  1. c) If you were asked to solve the equation you gave as your answer to part b), what concern would

Or should you have?         [Hint: Consider your answer to part a).]

  1. d) Given an appropriate discount rate of nine (9) percent, is this project acceptable? Please show

Your work.