A proposed nuclear power plant will cost $1.7 billion to build and then will pro
ID: 2810380 • Letter: A
Question
A proposed nuclear power plant will cost $1.7 billion to build and then will produce cash flows of $250 million a year for 15 years. After that period (in year 15), it must be decommissioned at a cost of $850 million. What is project NPV if the discount rate is 5%? What if it is 18%? (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 $1.7 billion to build and then will produce cash flows of $250 million a year for 15 years. After that period (in year 15), it must be decommissioned at a cost of $850 million. What is project NPV if the discount rate is 5%? What if it is 18%? (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations. Enter your answers in billions rounded to 3 decimal places.)
Discount Rate NPV 5% $ ____ Billion 18% $____ BillionExplanation / Answer
a.Present value of annuity=Annuity[1-(1+interest rate)^-time period]/rate
=$0.25[1-(1.05)^-15]/0.05
=$0.25*10.37965804
=$2.59491451 billion
Present value of outflows=Cash outflows*Present value of discounting factor(5%,time period)
=1.7 +$0.85million/1.05^15
=1.7+(0.850*0.481017098)
=$2.108864533 billion
NPV=Present value of inflows-Present value of outflows
=$2.59491451 billion-$2.108864533 billion
which is equal to
=$0.486 billion(Approx).
b.Present value of annuity=Annuity[1-(1+interest rate)^-time period]/rate
=$0.25*[1-(1.18)^-15]/0.18
=$0.25*5.091577559
=$1.27289439 billion
Present value of outflows=Cash outflows*Present value of discounting factor(5%,time period)
=1.7 +$0.85million/1.18^15
=1.7+(0.850*0.083516039)
=$1.770988633 billion
NPV=Present value of inflows-Present value of outflows
=$1.27289439 billion-$1.770988633 billion
which is equal to
=($0.498) billion(Approx).(Negative).
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