23 Feb Assume the following regarding a project. A project has a capital investment of $20M in year zero. Operating cost, sales revenue and associated probabilities as shown below. Project year 1
need a simplify approach to understanding Mirr and Risk adjusted NPV
Requirements: 2
Question 1
Assume the following regarding a project.
A project has a capital investment of $20M in year zero.
Operating cost, sales revenue and associated probabilities as shown below.
Project year 1 2 3 4 5
(a) Operating cost ($M) if:
(i) Demand is weak 4 4 4 4 4
(ii) Demand is avg. 5 5 5 5 5
(iii)Demand id good 10 10 10 10 10
(b) Sales revenue ($M) if:
(i) Demand is weak 6 6 6 6 6
(ii) Demand is avg. 9 9 9 9 9
(iii)Demand id good 18 18 18 18 18
The probabilities associated with demand are as follows:
Demand Probability
(i) Demand is weak – 0.3
(ii) Demand is avg. – 0.5
(iii) Demand id good – 0.2
The residual value of fixed assets is $4M.
The cost of equity is 18% and loan can be obtained at 12%. The leverage factor is 0.7. Inflation rate is projected to be 5% over the appraisal life of the project.
Compute the RDR and calculate the Expected NPV for the project.
Compute the Std. Dev. of the NPV and interpret the result.
Compute the CV and interpret the result.
2. A project has capital cost of $10,000 in year 0 and $5000 in year 1. There is also the need for capital replacement at year 3 of $4000. Working capital is estimated at $5000 and is needed in year 1. Operating cost from years 2-5 is estimated at $5000 per annum. Revenue is projected to be $8000 per annum between years 2 – 5. Salvage value from sale of fixed assets will be $2000 in year 3 and $4000 in year 5. The working capital is recoverable at the end of year 5. Net benefit can be invested at 12% per annum. Compute the MIRR and determine the project viability if the opportunity cost of capital is 10%.
