Consider the following information given below: Calculate the NPV of the propose

Question

Consider the following information given below:

   

   

Calculate the NPV of the proposed polyzone project, if spread in year 4 holds at $1.15 per pound. (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places.)

   

Year 0 Year 1 Year 2 Year 3 Year 4 Year 5-10   Investment 100      Required rate of return 8%   Production, millions of pounds per year 0    0 45 90 90 90   Spread, $ per pound 1.25    1.25 1.25 1.25 1.15 1.00   Production costs 0    0 35 35 35 35   Transport 0    0 9 10 10 10   Other costs 0    25 25 25 25 25

Explanation / Answer

Initial Investment = 100

since from Year 5-9 cash flows are same , We will use present value annuity factor from year 5 to year 10

NPV =present value of cash flows- initial investment

       =92.240945-100

        = (7.759055) or( 7.76 )

therefore project should not be accepted as NPV is negative.

Year 1 2 3 4 5-10 Total Revenue (A) - 56.25 [45*1.25] 112.50    [90*1.25] 103.50   [90*1.15] 90     [90*1] Less: Production cost 0 35 35 35 35 Transport 0 9 10 10 10 other cost 25 25 25 25 25 Total cost (B) 25 69 70 70 70 cash flow (A-B) (25) (12.75) 42.50 33.50 20 present value @ 8% [from Present value table .92593 .85734 .79383 .73503 3.39795** Present value of cash flows (23.14825) (10.931085) 33.737775 24.623505 67.959 92.240945

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