Question

In: Economics

Sammy's Ski Lodge has enough financial capital to undertake any or all of the following projects:...

Sammy's Ski Lodge has enough financial capital to undertake any or all of the following projects:

I. Buying a lift machine that will last 3 years and produce $3000 worth of services the first year, $2000 the second year, and $1000 the third year.

II. Developing and building a robot lift operator that will last 5 years and produce $5000 worth of services each year.

III. Building a new restaurant that will last 5 years and produce $30,000 worth of food and drink sales each year.

a.) If Sammy's only alternative to the above projects is putting his money in the bank and earning 5% interest, what is the present discounted value of each project's revenue stream?

i.) The PDV of project (I.)'s revenue stream is:

A. $5000 B. $5183 C. $5714 D. $5535

ii.) The PDV of project (II.)'s revenue stream is:

A. $25,000

B. $23,809

C.  $19,588

D. $21,647

iii.) The PDV of project (III.)'s revenue stream is:

A. $117,529

B. $142,857

C. $129,884

D.   $150,000

b.) Project (I) costs $5,800; project (II) costs $20,000; and project (III) costs $100,000. What is the NPV (Net Present Value = PDV of revenues minus PDV of costs) of each project? Which project(s) will Sammy choose to undertake? Why? Remember he can afford any or all of the projects.


i.) The NPV of project (I.) is:

A. -$265

B.  -$86

C.  -$617

D.  $200

ii.) The NPV of project (II.) is:

A.  -$412

B. $1647

C.  $3809

D.  $5000

iii.) The NPV of project (III.) is:

A.  $42,857

B.  $50,000

C.  $17,529

D.  $29,884

iv.) Sammy will choose to undertake project(s) ____________.

A.  I., II., and III.

B.  II. and III. only

C.  I. and III. only

D.  III. only

c.) For each project Sammy undertakes in (b), calculate its internal rate of return (IRR), namely the discount rate that makes the NPV of the project equal to zero.

[Hint: if he undertakes the project, its IRR should exceed 5%. Why?] You can't do this part without some computer/calculator help. Perhaps it's easiest to let the internet help you; check out this very helpful website: https://www.calculatestuff.com/financial/irr-calculator ]


i.) The IRR of project (I.) is:

A.   -3.45%

B. 2.06%

C.  3.45%

D.  1.14%

ii.) The IRR of project (II.) is:

A. 5.24%

B. 25%

C. 4.56%

D. 7.93%

iii.) The IRR of project (III.) is:

A. 15.24%

B. 11.36%

C.  8.45%

D. 25%

Solutions

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