The ranch you were hired to manage a few weeks ago is moving forward on two major projects: investment in a main road to navigate the ranch and a cabin for recreation and wildlife enterprise purposes. Cumulatively, these investments are expected to be $250,000, with 30 year project life. The road will primarily be used to allow hunters and photographers access to blinds and the cabin will be used for overnight accommodations. However, the road will also be used for the livestock enterprises also (i.e., there are some induced costs). The expected returns are $50,000 in the first year decreasing $5,000 a year for the first 5 years and then decreasing $1,000 a year until the end of the project life, ending at $5,000 cash flow in year 30.
A. Describe at least 3 opportunity costs associated with investing in these projects.
B. What is the NPV and IRR of the two projects listed above (assume that the interest rate is 5%)?
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