See attached file

1
    a)
    Year    0    1    2    3    4    5    6    7    8    9    10
    EBIT        44    44    44    44    44    44    44    44    44    44
    Tax rate    35%
    Free cash flow calculations
    EBIT * (1 - T)        28.60    28.60    28.60    28.60    28.60    28.60    28.60    28.60    28.60    28.60
    Depreciation        16.00    16.00    16.00    16.00    16.00    16.00    16.00    16.00    16.00    16.00
    Investment in working capital        (5.00)    (5.00)    (5.00)    (5.00)    (5.00)    (5.00)    (5.00)    (5.00)    (5.00)    (5.00)
    Continuation value                                            12.00
    Free Cash flows        39.60    39.60    39.60    39.60    39.60    39.60    39.60    39.60    39.60    51.60
    b)
    NPV = - C0 + PV of annuity of 39.60 over 10 years + PV of continuation value
    Discount rate, r = 11%; n = 10
    = - 160 + 39.60 / r x [1 - (1 + r)-n] + 12 x (1 + r)-10 = - 160 + 39.60 / 11% x [1 - (1 + 11%)-10] + 12 x (1 + 11%)-10
    = $ 77.44 million
    c)
    We keep changing the r to different values to get NPVs.
    Hence, NPV15% = $ 41.71 million
    NPV20% = $ 7.96 million
    NPV25% = - $ 17.32 million
    d)
    IRR is that discount rate at which NPV of the project is zero. Based on the results in part (b) & (c) we can say that:
    NPV declines as discount rate increases
    NPV must be becoming zero at a discount rate somewhere in between 20% and 25%
    Hence 20% < IRR < 25%
    IRR can be prorated and approximated as = 20% + 7.96 / (7.96 + 17.32) x (25% - 20%) = 21.57%
2
    Initial Cost    $150.00    million
    Present Value of each year's free cash flow of $25million for next 10 years    $193.04    million
    PMT    25
    nper    10
    Rate    5%
    PV    ($193.04)
    Present Value of Maintenance Cost starting from 11th Year    $44.00    million
    Present Value of Maintenance Cost     $27.01    million
    a)
    NPV    $16.03    million
    b)
    Initial Cost    $150.00    million
    PMT    25
    nper    10
    Rate    1%
    PV    ($236.78)
    Maintenance Cost at 10th...