Question

In: Finance

A proposed nuclear power plant will cost $1.7 billion to build and then will produce cash...

A proposed nuclear power plant will cost $1.7 billion to build and then will produce cash flows of $250 million a year for 15 years. After that period (in year 15), it must be decommissioned at a cost of $850 million. What is project NPV if the discount rate is 5%? What if it is 18%? (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations. Enter your answers in billions rounded to 3 decimal places.)

Discount Rate	NPV
5%	$ ____ Billion
18%	$____ Billion

Expert Solution

a.Present value of annuity=Annuity[1-(1+interest rate)^-time period]/rate

=$0.25[1-(1.05)^-15]/0.05

=$0.25*10.37965804

=$2.59491451 billion

Present value of outflows=Cash outflows*Present value of discounting factor(5%,time period)

=1.7 +$0.85million/1.05^15

=1.7+(0.850*0.481017098)

=$2.108864533 billion

NPV=Present value of inflows-Present value of outflows

=$2.59491451 billion-$2.108864533 billion

which is equal to

=$0.486 billion(Approx).

b.Present value of annuity=Annuity[1-(1+interest rate)^-time period]/rate

=$0.25*[1-(1.18)^-15]/0.18

=$0.25*5.091577559

=$1.27289439 billion

Present value of outflows=Cash outflows*Present value of discounting factor(5%,time period)

=1.7 +$0.85million/1.18^15

=1.7+(0.850*0.083516039)

=$1.770988633 billion

NPV=Present value of inflows-Present value of outflows

=$1.27289439 billion-$1.770988633 billion

which is equal to

=($0.498) billion(Approx).(Negative).

jeff jeffy answered 2 years ago

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