Question

7. 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 $17 million. The project would last 3 years, the corporate tax rate is 40%, and the WACC is 12%. What is the new NPV of the project, after incorporating the effect of the opportunity cost?

Answer 1

Computation of opportunity cost
	i	ii	iii	iv=ii*iii
year	Cash flow	Post tax cash flow	PVIF @ 12%	present value
1	17	10.2	0.8929	9.11
2	17	10.2	0.7972	8.13
3	17	10.2	0.7118	7.26
				24.50
Opportunity cost =		24.50
therefore
new NPV of the project, after incorporating the effect of the opportunity cost
=100-24.5=		75.50	mil
ans =		75.50	mil