Your company is considering the following investment: Investment required: $600,

Question

Your company is considering the following investment:

Investment required: $600,000,000

Annual Gross Operating Revenue: $280,000,000

Annual Operating Costs: $90,000,000

Salvage after 10 years $0

The operation is expected to be active for ten years, and the development cost (the investment

amount) is done in a one-time payment. Senior management expects a 25% (interest rate) return

on investment before taxes. Draw the cash flow diagram and find the present value (NPV) of

the project? (Ignore the effects of inflation and tax)

Explanation / Answer

0-----------------------1----------------------2--------------3--------------4-----------------5------------6

-$600,000,000 190000000 190000000 190000000190000000 190000000190000000

---------7-----------------8------------------------9-----------------10

190000000 190000000 190000000 190000000

present value (NPV) of

the project = -600000000+190000000*PVIFA(25%,10) = -600000000+190000000*3.5705 = 78395000

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