52.3

3. Your firm is considering a project with the following cash flows: an immediate investment of $150 million, cash inflows of $60 million per year for 10 years (starting next year), and a shut-down expense of $30 million in year 10. Your discount rate for this project is 10% (per year) Give and justify your recommendation for whether your firm should take this project. (2 pts)

Ok, standard operating procedure is to start with a cashflow diagram:

0	1	2…	10
-150	60	60 …	60
			-30

We need to do NPV in order to determine whether this is a good deal. You should note that the 10 cash flows of $60million look suspiciously like a standard annuity. We'll have to treat the shutdown expense separately, however.

Your recommendation should be to take the project. As justification point out that the NPV is over $200 million, meaning that counting all of the costs and benefits, the project adds more than $200 million in value to the company today if taken.

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