Reference no: EM133110974
Q1. You buy and sell mobile phones. Someone is offering you a chance to buy their used phone. They are willing to sell their used I-phone 12 to you for $ 600. The screen is broken. To repair, it would cost you $ 200. Because of the supply chain crunch, you can only order materials in next year (year 1). Once you repair it, you would be able sell the phone for $ 1,000 (year 1). Would you undertake this project? (Ignore time value of money)
Q2. For question number 1, calculate the NPV using the discounted cash flow approach. Assume interest rate is 5% per annum.
Q3. Shell is evaluating whether to construct oil well in Lethbridge, Alberta. Constructing the oil well will cost $ 14 million now. It would take 1 year to construct the well. The following will be the output from the oil well once it is constructed.
First year: 60,000 barrels.
Second year: 70,000 barrels
Third year: 80,000 barrels
Fourth year: 100,000 barrels.
Fifth year: No oil production but shell must decommission oil well and it expects to pay around $ 1 million as a decommissioning cost.
The current price of crude oil per barrel is $ 50/ barrel. The oil price is expected to grow at 2% per year thereafter. If the discounting rate is 10%, would you undertake the project. What other non-financial considerations you would take into effect when you make this decision.
[Hint: year 0 you would have cash inflow of $ 14 million; year 2 no activities; year 3 would be 60,000 barrels; year 4 would be 70,000 barrels and so on. Remember to increase the cash savings]
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