GDebi Enterprises is thinking of building a chemical processing plant to produce

Question

GDebi Enterprises is thinking of building a chemical processing plant to produce 4-hydroxy-3-methoxybenzaldehyde. The firm estimates that the initial cost of the project will be $10.5 million, and the plant will produce cash inflows of $6.2 million for the next 5 years, after which time the project will terminate. In the 6th year however, the firm will need to clean up the site, which it estimates will cost it $3.1 million. The discount rate the firm wants to use for the project is 13.1 percent. What is the NPV of this project?

Explanation / Answer

Cashflow for year 1 to 5 =$6.2 million

Cash flow in year 6 = -$3.1 million

NPV calculation:

Hence, the NPV for the project is $9.77 million

Year Cash Flow Present Value 0 -10.5 -10.5 1 6.2 5.48 2 6.2 4.85 3 6.2 4.29 4 6.2 3.79 5 6.2 3.35 6 -3.1 -1.48 NPV 9.77

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