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Iota Industries is an all-equity firm with 50 million shares outstanding.Iota has $200 million in cash and expects future free cash flows of $75 million per year.Management plans to use the cash to expand the firm's operations,which in turn will increase future free cash flows by 12%.Iota's cost of capital is 10% and assume that capital markets are perfect.
-The NPV of Iota's expansion project is closest to:
A)-$110 million.
B)-$137.5 million.
C)$0.
D)$75 million.

Question

Quizplus · Accepted Answer

The NPV of the expansion project is the present value of the incremental free cash flows, which are $75 million per year multiplied by 1.12, or $84 million per year. The present value of these cash flows is $84 million / 0.10 = $840 million. The initial investment is $200 million, so the NPV is $840 million - $200 million = $640 million.

Use the Information for the Question(s)below