Question

1. The Ulmer Uranium Company has the opportunity to invest in one of two mutually exclusive projects. Project A costs $10 million and should project cash flows of $4 per year for 5 years. Project B costs $15 million and should produce cash flows of $3.5 million for 10 years. The cost of capital is 10%. Which of these two projects should be selected? Show any calculations needed to support your answer.

Answer 1

09 (10,000,000.00) 3,636,363.64 3,305,785.12 3,005,259.20 2,732,053.82 2,483,685.29 5,163,147.08 fx -SUM(D3:08) AB 1 A 2 year Cash flows pv@10% Present value 3 0 $ (10,000,000.00 1.0000 $ 4 11 $ 4,000,000.00 0.9091 $ 5 2 $ 4,000,000.00 0.8264 $ 6 3 $ 4,000,000.00 0.7513 $ 7 4 $ 4,000,000.00 0.6830 $ 8 5 $ 4,000,000.00 0.6209 $ 9 NPV $ 10 B 11 year Cash flows pv@10% Present value 12 0 $ (15,000,000.00) 1.0000 $ 13 1 $ 3,500,000.00 0.9091 $ 14 21 $ 3,500,000.00 0.8264 $ 15 3 $ 3,500,000.00 0.7513 $ 16 4 $ 3,500,000.00 0.6830 $ 5 $ 3,500,000.00 0.6209 $ 6$ 3,500,000.00 0.5645 $ 7 $ 3,500,000.00 0.5132 $ 20 8 $ 3,500,000.00 0.4665 $ 9 $ 3,500,000.00 0.4241 $ 22 10 $ 3,500,000.00 0.3855 S NPV $ Accept Project B (15,000,000.00) 3,181,818.18 2,892,561.98 2,629,601.80 2,390,547.09 2,173,224.63 1,975,658.76 1,796,053.41 1,632,775.83 1,484,341.66 1,349,401.51 6,505,984.87

fc =SUM(D3:08) D pv@10% Cash flows - 10000000 4000000 4000000 4000000 4000000 4000000 09 А 1 A 2 year 30 4 1 52 63 7 4 85 9 10 B 11 year 120 13 1 14 2 15 3 16 4 17 5 18 6 19 7 =C3/1.1 =C4/1.1 =C5/1.1 =C6/1.1 =C7/1.1 NPV Present value =B3*C3 =B4*C4 =B5*C5 =B6*C6 =B7*C7 =B8C8 =SUM(D3:08) pv@10% Cash flows - 15000000 3500000 3500000 3500000 3500000 3500000 3500000 3500000 3500000 3500000 3500000 =C12/1.1 =C13/1.1 =C14/1.1 =C15/1.1 =C16/1.1 =C17/1.1 =C18/1.1 =C19/1.1 =C20/1.1 =C21/1.1 NPV Present value =B12*C12 =B13*C13 =B14*C14 =B15*C15 =B16*C16 =B17*C17 =B18*C18 =B19*C19 =B20*C20 =B21*C21 =B22*C22 =SUM(D12:022) Accept Project B 20 8 22 10