Assume you have completed a capital budgeting analysis of building a new plant o

Question

Assume you have completed a capital budgeting analysis of building a new plant on land you own, and the project's NPV is $100 million. You now realize that instead of building the plant, you could build a parking garage, and would generate a pre tax revenue of $21 million. The project would last 3 years, the corporate tax rate is 40%, and the WACC is 6%. What is the new NPV of the project, after incorporating the effect of the opportunity cost?

Enter your answer in millions of dollars, rounded to 2 decimals, without the dollar sign. So, if your answer is 12,345.6789, just enter 12345.68.

Explanation / Answer

NPV of project after incorporating the effect is 33.68-100= -66.32

NPV of project after incorporating effect is -66.32 million

Calculation of NPV: Year Revenue PVF @6% Amount 1 12.6 0.943 11.887 2 12.6 0.890 11.214 3 12.6 0.840 10.579 NPV 33.680

NPV of project after incorporating the effect is 33.68-100= -66.32

NPV of project after incorporating effect is -66.32 million

Working Note: Calculation of Revenue after tax: Revenue after tax= 21*(1-0.40)= 21*0.60= 12.60

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.