You are evaluating a project in the country of Expropriationstan. You estimate end-of-year cash flows as follows. Assume your discount rate for evaluating projects of this sort in Expropriationstan is 15%.

a. Compute the NPV and IRR of these cash flows. State a reject/accept recommendation.

b. Expropriationstan is trying to improve its economy. You find out that you will be blocked from using any net cash inflows your project generates for one year, and must "reinvest" the cash flows with the government for one year. (The government insists.)

Assume the "reinvestment rate" the government pays while it holds your cash is 5%; after a year, you get the cash flow back along with any accrued interest that was paid by the government. (If you have trouble conceptualizing this, imagine for a moment that the reinvestment rate were instead zero; what would the cash flows look like then?).

Recomputed the NPV and IRR, and make a new reject/accept recommendation.

c. You fear that the Expropriations tani government might lower its country's interest rates, and hence its "reinvestment rate" that it pays. What "reinvestment rate" makes the project zero NPV?

Posted Date: 2/20/2013 12:28:21 AM | Location : United States

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