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In: Finance

Organic Farms is considering an investment in a new irrigation system that will cost $65,000 and...

Organic Farms is considering an investment in a new irrigation system that will cost $65,000 and last for four years. The firm's cost of capital, appropriate for this project, is 8.00% per year. The incremental free cash flows for the irrigation project are as follows:

Year

Free Cash Flows

0

-$65,000

1

20,300

2

20,300

3

20,300

4

20,300

Compute the NPV for the project. Identify the correct formula used to solve the previous problem.

Compute the IRR for the project.Identify the correct formula used to solve the previous problem.

Blue Star Airlines is considering a three-year charter agreement with Adventure Leisure to transport its tour groups to their vacation destinations. If Blue Star goes ahead with the deal, it would need to invest $20.00 million up front in additional equipment. Blue Star’s estimated cost of capital, appropriate for this project, is 10.00% per year. The project’s free cash flows are estimated as follows:

Blue Star Airlines

Free Cash Flow ($ Millions)

Year 0

Year 1

Year 2

Year 3

Free Cash Flow

($20.00)

$5.75

$8.50

$12.50

Blue Star has asked for your help. Compute the NPV of the project. Identify the correct formula used to solve the previous problem

Solutions

Expert Solution

organic fram NPV = $ 2235.63

IRR = 9.5363%

Blue star airlines NPV = $ 1.6435 MILLION

jeff jeffy answered 1 year ago
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