Question

2.) Mutually exclusive projects may be ranked differently when higher or lower discount rates are used.

a. True

b. False

13.) The option to abandon a project before the end of its forecasted life may increase its NPV.

a. True

b. False

18.) Porter Climate Control is evaluating a proposal to move some manufacturing operations from an obsolescent plant in Illinois to a new facility in Mexico. The new facility will cost $58 million to open. and is expected to result in savings of $16 million per year for the first five years. At the end of 5 years, Porter will decide either to close the plant in Mexico or to keep it indefinitely. If Porter closes the plant, the building and equipment can be sold for $20,000,000. If the plant is kept, assume that the $16 million turns into a perpetuity. There is a 30% chance the plant will be closed and a 70% chance it will be kept. Compute the expected NPV of the project. Use a discount rate of 12%.

a. $75.32 million

b. ($30.32 million)

c. $56.04 million

d. $114.04 million

Answer 1

Ans 2	Statement is TRUE :
	Mutually exclusive projects may be ranked differently when higher or lower discount rates are used.
Ans 13	Statement is TRUE :
	The option to abandon a project before the end of its forecasted life may increase its NPV.
Ans 18
	NPV if plant is sold
	year	Cash flow		PVIF @ 12%	present value
	0	-58		1.0000	(58.00)
	1	16		0.8929	14.29
	2	16		0.7972	12.76
	3	16		0.7118	11.39
	4	16		0.6355	10.17
	5	36	=16+20	0.5674	20.43
					11.02
	NPV if plant is continued
	PV of cash flow =		=16/12%		133.33
	initial investment				-58
	Net present value				75.33
	therefore expected NPV =11.2*30%+75.33*70%						56.04
	Therefore correct answer is option C.						56.04