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You have only 100,000,000 and you cannot raise any additional funds. There are three investment opportunities you can undertake. Opportunity 1: This requires an initial investment at time 0 of 42,000,000. The assets will be depreciated straight line in 5 years. The revenues from sales of the first year are equal to 15,000,000 while the costs for the same year are equal to 6,300,000. Costs will stay constant for the next 10 years while sales will grow at a 4% rate every year until year 6, and then decrease at a 7% rate from year 7 (included) to year 10, when the project life will end. This project requires no working capital and the assets will have zero salvage value. Opportunity 2: This requires 34,000,000 initial investment in fixed assets to be depreciated straight line in 13 years. The investment produces a net cash flow (excluding the initial investment) of 3,000,000 every year for the next 25 years. Opportunity 3: This project requires an investment in fixed assets, at time 0, of 44,000,000. Assets will be depreciated straight line in 5 years. This project has a 4 year life. The revenues for each of the 4 year of life are the following Year 1 2 3 4 Revenues 14,000,000 39,000,000 42,000,000 47,000,000 The cost of good sold and the level of working capital at the end of the year (the project starts with a 0 working capital at time 0) are reported below Year 1 2 3 4 Cost of goods sold 15,000,000 16,000,000 14,000,000 15,500,000 Working Capital 30,000,000 30,000,000 35,000,000 0 The assets at the end of year 4 will have a salvage value of 1,000,000. The opportunity cost of capital is 7.50% for the first investment opportunity, 4.56% for the second opportunity and 3.55% for the third. You have positive taxable income coming from other investments in place. The corporate tax rate is 26%. Each of the three investment opportunities is indivisible, that is, either you undertake a given investment opportunity or not; you cannot undertake just part of it. a)

What is the NPV of each one of the three opportunities? [17 Points] b) Considering your constraints, in which opportunity would you invest? Why? [8 Points]

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