Coca-Cola Amatil (CCL)has a weighted average cost of capital of 11%. CCL is considering investing in a new plant that will save the company $30 million over each of the first two years, and then $25 million each year thereafter. If the investment is $150 million, what is the net present value (NPV)of the project?

Question

Quizplus · Accepted Answer

To calculate the NPV of the project, we need to first calculate the cash flows for each year, and then discount them back to their present values using the weighted average cost of capital (WACC) of 11%.

Year 1: $30 million in savings
Year 2: $30 million in savings
Year 3: $25 million in savings
Year 4: $25 million in savings
Year 5: $25 million in savings
Year 6: $25 million in savings

To calculate the present value of each year's cash flows, we use the formula PV = FV / (1 + r)n, where PV is the present value, FV is the future value, r is the WACC, and n is the number of years in the future.

Using this formula, we get:

Year 1: PV = $30m / (1+0.11)^1 = $26.93m
Year 2: PV = $30m / (1+0.11)^2 = $24.21m
Year 3: PV = $25m / (1+0.11)^3 = $18.01m
Year 4: PV = $25m / (1+0.11)^4 = $16.16m
Year 5: PV = $25m / (1+0.11)^5 = $14.50m
Year 6: PV = $25m / (1+0.11)^6 = $13.02m

To calculate the NPV, we sum up the present values of all the cash flows, and subtract the initial investment of $150m.

NPV = -$150m + $26.93m + $24.21m + $18.01m + $16.16m + $14.50m + $13.02m = $86 million

Therefore, the correct answer is B) $86 million.

Coca-Cola Amatil (CCL)has a Weighted Average Cost of Capital of 11