Question

Refer to Questions 2 and 3. The land for the factory will cost $610,000 . The factory will cost $8,960,000 to build and construction will take two years with construction costs payable in equal installments at the start of each year. The factory will operate for 20 years. At the end of its 20 year lifespan, the land can be resold for $230,000 . There is a 70% probability that the factory's net operating cash flows will be $1,086,599 ; however, there is a 30% chance that net cash flows will only be $660,183 . You may assume that net operating cash flows are received at the end of each year.

a) What are the Expected net operating cash flows per year? Enter Answer (1 Mark)(Round your answer to 2 decimal places)

b) What is the Internal Rate of Return for the project? Enter Answer (1 Mark)(Round your answer to one one-hundreth of a percent)

c) What is the Net Present Value of the project? Enter Answer (1 Mark)(Round your answer to 2 decimal places)

d) Should Anna recommend that the J Corporation build the factory? Yes No ↑

REFFER TOO MY OTHER ANSWERED QUESTIONS FOR QUESTION 2 AND 3

Answer 1

Answer to a

Probabiliy	Net Operating Cash Flow
70%	1086599
30%	660183
Expected Operating Cash Flow		958674.20

Answer to B

YEARS	Cash Flows
0	-610000
1	-4480000
2	-4480000
3	958674.2
4	958674.2
5	958674.2
6	958674.2
7	958674.2
8	958674.2
9	958674.2
10	958674.2
11	958674.2
12	958674.2
13	958674.2
14	958674.2
15	958674.2
16	958674.2
17	958674.2
18	958674.2
19	958674.2
20	1188674.2
IRR	6.67%

Answer to C. Assuming rate of Discount is 10%

YEARS	Cash Flows	PV @10 %
0	-610000	-610000
1	-4480000	-4072727
2	-4480000	-3702479
3	958674.2	720266.1
4	958674.2	654787.4
5	958674.2	595261.3
6	958674.2	541146.6
7	958674.2	491951.4
8	958674.2	447228.6
9	958674.2	406571.4
10	958674.2	369610.4
11	958674.2	336009.5
12	958674.2	305463.1
13	958674.2	277693.8
14	958674.2	252448.9
15	958674.2	229499
16	958674.2	208635.4
17	958674.2	189668.6
18	958674.2	172426
19	958674.2	156750.9
20	1188674.2	176688.8
	NPV	-1853099

Answer to D

If Anna's Cost of Capital is less than 7% then it is a viable proposition to set up a factory, otherwise it is not a viable option.