2.Road trip Inc, a construction company, is considering constructing a new toll road in Illinois. The construction of the toll road will take 5 years and will cost $1,000,000 per year for each of the first 5 years (the payments will be made at the end of each year). Once the toll road will start to operate, it is expected to generate $900,000 in revenues per year for 15 years (at the end of each operation year). Suppose that the cost of capital of Road trip Inc. is 10%.

a.Should the company construct the toll road?

b.Suppose that the cost of capital of Road trip Inc is 12%. Should the company construct the toll road?

3.Delta cement Inc. is considering constructing a new cement factory in California. The construction of the new cement factory will cost $16,000,000 (paid today). It will take 3 years to build the factory (there will be no additional costs during those 3 years). Once operating, the factory will generate $2,000,000 per year for 23 years (the cash flow will be received at the end of each year). At the end of the operating period, the company will have to clean the site. Cleaning the site will cost $30,000,000. The cost of capital of the company is 8%.

a.Can you use the IRR rule in order to make an investment decision in this case? Explain.

b.Calculate the NPV of the project

c. What is IRR of the project? (choose the right answer)

i. 4.55%

ii. 8%

iii. 3.35%

iv. 5.35%

5You are the CEO of a high-tech company. The following table presents the expected cash flows from two mutually exclusive one-time projects you consider investing in:

Year0-Year1-Year2-Year3-Year4-Year5

project A -1000 400 400 600 600

project B -1000 400 1000 300 100

Your company's cost of capital is 10%

a. In which of the projects should the company invest according to the IRR criterion?

In order to solve the question, write down the equations and find out which is the right IRR for each project out of the following IRR alternatives:

(1) 28.45%

(2) 34.79%

(3) 31.5%

(4) 0%

b.In which of the projects should the company invest according to the NPV criterion?

c.Explain why there a difference between the answers to items (a) and (b).

d.Taking into consideration the answers to items (a) and (b), which project will your company undertake?You are the CEO of Bizzer Inc., a mature pharmaceutical company. In two years the patent on the companys most profitable drug is about to expire. Therefore, the company looks for new drug developments. The R&D department has presented the following investments (suppose that the time it takes to finish developing a new drug and the number of positive cash flow periods are the same for each of the drugs in development):

Drug development

Initial investment (in thousands of $)

NPV of the project (in thousands of $)

A. 175. 50

B. 850. 300

C. 450. 100

D. 1200. 500

E. 150. -20

a.Suppose that the projects are mutually exclusive, which project should the company choose to invest in?

b.Suppose that the projects are not mutually exclusive and the company does not have any resource constraints. Which projects should the company choose to invest in?

c.Suppose that the projects are not mutually exclusive and partial projects are available. The company has only $2,155 (thousand) available funds for investments. Which projects should the company choose to invest in?

d.What is the company's PV (positive cash flows only, not NPV) from all of the projects that the company chose in c.?

e.suppose that the projects are not mutually exclusive and partial projects are not available. The company has only $1,650 (thousand) available funds for investment. Which projects should the company choose to invest in?