3 Net Present Value Part A 00 to construct and will last 5 years (it is con An e
ID: 1137118 • Letter: 3
Question
3 Net Present Value Part A 00 to construct and will last 5 years (it is con An ethanol processing facility costs $25,0 structed in year 0 and runs from year 1 through year 5). It produces 1000 barrels of ethanol per year and can charge a price of $10 per barrel. If the interest rate is 7%, what is the net present value of this facility? Part B A different ethanol processing facility costs $800,000 to construct but will instead last forever. Every year (starting the year after construction), it produces 10,000 barrels of ethanol and can charge a price of $4 per barrel. At what interest rate would an investor be indifferent between constructing the facility and simply keeping the money?Explanation / Answer
A) n = 5 and r = 7%
NPV = -25000 + 1000 x 10/(1 + 7%) + .... + 10000/(1 + 7%)5
NPV = $ 16001.97
B) let the interest rate = r
Equate the net present value = 0
800000 = 10000 x 4/(1 + r) + 40000/(1 + r)2 + .......
800000 = 10000 x 4/r
r = 5%
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