solution

You are analyzing a project with a thirty-year lifetime, with the following characteristics:

â€¢ The project will require an initial investment of $20 million and additional investments of $5 million in year ten and $5 million in year twenty.

â€¢ The project will generate earnings before interest and taxes of $3 million each year. (The tax rate is 40%.)

â€¢ The depreciation will amount to $500,000 each year, and the salvage value of the equipment will be equal to the remaining book value at the end of year thirty.

â€¢ The cost of capital is 12.5%.

a. Estimate the NPV of this project.

b. Estimate the IRR on this project. What might be some of the problems in estimating the IRR for this project?

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