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investment of $ 20 million needed to upgrade the plant in 10 years. If the discount rate is

10%,

a. Estimate the Net Present Value of the project.

b. Prepare a Net Present Value Profile for this project.

c. Estimate the Internal Rate of Return for this project. Is there any aspect of the

cashflows that may prove to be a problem for calculating IRR?

20. You have been asked to analyze a project, where the analyst has estimated the return

on capital to be 37% over the ten-year lifetime of the project. While the cost of capital is

only 12%, you have concerns about using the return on capital as an investment decision

rule. Would it make a difference if you knew that the project was employing an

accelerated depreciation method to compute depreciation? Why?

21. Accounting rates of return are based upon accounting income and book value of

investment, whereas internal rates of return are based upon cashflows and take into

account the time value of money. Under what conditions will the two approaches give

you similar estimates?

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