A proposed nuclear power plant will cost $2.3 billion to build and then will pro

Question

A proposed nuclear power plant will cost $2.3 billion to build and then will produce cash flows of $310 million a year for 15 years. After that period (in year 15), it must be decommissioned at a cost of $910 million. What is project NPV if the discount rate is 4%? What if it is 17%? (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations. Enter your answers in billions rounded to 3 decimal places.)

A proposed nuclear power plant will cost $2.3 billion to build and then will produce cash flows of $310 million a year for 15 years. After that period (in year 15), it must be decommissioned at a cost of $910 million. What is project NPV if the discount rate is 4%? What if it is 17%? (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations. Enter your answers in billions rounded to 3 decimal places.)

Explanation / Answer

Note that the initial investment is $2.3 billion, annual benefits amount to $310 million and decommissioned cost (disposing off) is $910. The time period for the plant is 15 years.

NPV when discount rate is 4%

= -2300 million + 310(P/A, 4%, 15) - 910(P/F, 4%, 15)

= -2300 million + 310 million (11.118) - 910 million (0.5553)

= $641.164 million or $0.641 billion

NPV when discount rate is 17%

= -2300 million + 310(P/A, 17%, 15) - 910(P/F, 17%, 15)

= -2300 million + $1650.498 million - $86.348

= -$735.848 million or (- $0.735 billion)

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