Systems Analysis and Synthesis

C.11. Chapter 11

1. Although a low cost of capital usually increases the present value of a project, it isn’t always the case.

    A small opencast mining project requires an initial investment, offers a good return in the first year, but is complete by the end of its second year. In its second year, it makes a loss, because the terms of the lease require the site to be filled and made good. The initial investment is $10,000,000, the return at the end of Year 1 is $21,500,000, and the loss at the end of Year 2 is $11,550,000. Express the present value of the project as a quadratic equation in 1∕(1+r), the discount factor. For what values of the cost ...