Shanghai Shipping is considering investing in a project that requires an after-t

Question

Shanghai Shipping is considering investing in a project that requires an after-tax initial investment of 156 million and is expected to produce after-tax cash inflows of $40 million for each of the next five years. The firm’s cost of capital is 8%. Based on this information, the IRR of the project is _________ percent and the firm should _________ the project.

a.                9.9; accept

b.                9.9, reject

c.                8.9, accept

d.                8.9, reject

a.                9.9; accept

b.                9.9, reject

c.                8.9, accept

d.                8.9, reject

Explanation / Answer

Solution:

IRR can be calculated as -

-4.36

Answer is c.                8.9, accept

NPV @ 8 % (in millions) Initial investment 156 After-tax cash inflows 40 PVAF @ 8 , 5 years 3.99 Present Value of cash flows ( After-tax cash inflows * PVAF @ 8 , 5 years ) 159.6 NPV= Present Value of cash flows - Initial investment 3.6

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