Exam 7: Making Capital Investment Decisions: Further Issues

Mercury Metals has up to $100 million budgeted to purchase high efficiency smelters. The company has an 12% hurdle rate. A part of a smelter cannot be purchased. If Smelter A will cost $55 million and provide an expected income before depreciation of $16 million for each of 20 years and Smelter B will cost $90 million and provide an expected income before depreciation of $22 million in each of 20 years, which is the project Mercury Metals should undertake?

Norris Gears Inc. owns land with two vacant warehouses which it could sell as is or be rezoned from commercial to light industrial and the buildings upgraded for manufacturing at a cost of $2,450,000 and used for 15 years. There is a 30% chance the rezoning application will be rejected and then Norris will sell the land after one year to make it saleable. If the property is re-zoned Norris estimates a 25% probability that its sales will be $400,000 per year after expenses and before depreciation, a 65% probability that sales will be $300,000 and a 10% that sales will be low at $200,000. If the property is not rezoned and Norris Gears sells the land, there is a 10% probability that the land will be sold this year at $145,000, an 85% probability that the land will go for $115,000 and a 5% probability it goes for $95,000. What is the net present value to Norris of land with warehouses if the company's hurdle rate is 8%?