Green 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 Green'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

First, we need to calculate the present value of the incremental cash flows:

PV of Year 1 Cash Flow = $45 million / (1 + 8%)^1 = $41.67 million
PV of Year 2 Cash Flow = $45 million / (1 + 8%)^2 = $38.58 million
PV of Year 3 Cash Flow = $45 million / (1 + 8%)^3 = $35.74 million
PV of Year 4 Cash Flow = $45 million / (1 + 8%)^4 = $33.13 million
PV of Year 5 Cash Flow = $45 million / (1 + 8%)^5 = $30.72 million

Next, we need to calculate the present value of the project costs:

PV of Project Costs = -$380 million / (1 + 8%)^0 = -$380 million
PV of Issuance Costs = -$10 million / (1 + 8%)^0 = -$10 million

Finally, we can calculate the net present value of the project:

NPV = PV of Cash Flows - PV of Project Costs - PV of Issuance Costs
NPV = $41.67 million + $38.58 million + $35.74 million + $33.13 million + $30.72 million - $380 million - $10 million
NPV = $149.84 million - $380 million - $10 million
NPV = -$240.16 million

The net present value of the project is negative, which means that the project is not expected to generate enough cash flows to cover its costs and meet the required rate of return. Therefore, the best choice is B, which is the closest to the calculated NPV of -$240.16 million.

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