Prof. Ian Giddy, New York University
Backround and Required Return on Capital
The Cloudbridge Nature Reserve, located in the Talamanca mountain range of Costa Rica, has received a gift of $2,300. The donor has recommended that, consistent with the goals of the reserve, the money be invested for the long term in a local forestry enterprise, CRFR. This, the donor argued, would produce a substantial profit which could be used for conservation purposes in the long run. Because Cloudbridge is a nonprofit organization, the profits will not be taxed.
The Reserve's trustees must evaluate the forestry investment. They have worked out that to be worthwhile, the investment must give a rate of return of at least 13.7%. This number is based on the following calculation:
Projected Cash Flows
1. What is the present value of the projected cash flows of this project?
2. What is the internal rate of return on this investment?