Ford Motors expects a new hybrid-engine project to produce incremental cash flows of $45 million each year,and expects these to grow at 5% each year.The upfront project costs are $380 million and Ford's weighted average cost of capital is 8%.If the issuance costs for external finances are $10 million,what is the net present value (NPV)of the project?

Question

Quizplus · Accepted Answer

1. Calculate the present value of cash flows:
PV of cash flows = $45 million / (8% - 5%) = $1.5 billion

2. Calculate the NPV:
NPV = PV of cash flows - upfront project costs - issuance costs
NPV = $1.5 billion - $380 million - $10 million
NPV = $1.11 billion

Therefore, the net present value (NPV) of the project is $1.11 billion, which is closest to option C.

Ford Motors Expects a New Hybrid-Engine Project to Produce Incremental