Question

Q1/GDebi Enterprises is thinking of building a chemical processing plant to produce 4-hydroxy-3-methoxybenzaldehyde. The firm estimates that the initial cost of the project will be $14.6 million, and the plant will produce cash inflows of $7.2 million for the next 5 years, after which time the project will terminate. In the 6th year however, the firm will need to clean up the site, which it estimates will cost it $4.9 million. The discount rate the firm wants to use for the project is 13.5 percent. What is the NPV of this project? (Enter answer in millions.)

Q2/The Blueberry Company is considering a project which will cost $382 initially. The project will not produce any cash flows for the first 3 years. Starting in year 4, the project will produce cash inflows of $575 a year for 5 years. This project is risky, so the firm has assigned it a discount rate of 19.6 percent. What is the net present value?

Q3/A project has the following cash flows for years 0 through 4. What is the payback period?

year	0	1	2	3	4
CF	-5,414	2,513	3,422	1,571	18 gazillion

Answer 1

1)

NPV = present value of cash inflows - present value of cash outflows

Present value of cash inflows = 7,200,000 / ( 1 + 0.135)¹ + 7,200,000 / ( 1 + 0.135)² + 7,200,000 / ( 1 + 0.135)³ + 7,200,000 / ( 1 + 0.135)⁴ + 7,200,000 / ( 1 + 0.135)⁵

Present value of cash inflows = $25,018,147.24

Present value of the cost to clean up site = 4,900,000 / ( 1 + 0.135)⁶

Present value of the cost to clean up site = 2,292,033.24

Total cash outflow = 2,292,033.24 + 14,600,000

Total cash outflow = 16,892,033.24

NPV = 25,018,147.24 - 16,892,033.24 = $8,126,114

2)

Present value at year 3 = 575 / ( 1 + 0.196)¹ + 575 / ( 1 + 0.196)² + 575 / ( 1 + 0.196)³ + 575 / ( 1 + 0.196)⁴ + 575 / ( 1 + 0.196)⁵

Present value at year 3 = 1,734.848

Present value at year 0 = 1,734.848 / ( 1 + 0.196)³

Present value at year 0 = 1,014.069

NPV = 1,014.069 - 382 = $632.07

3)

Cumulative cash flow at year 0 = -5414

Cumulative cash flow at year 1 = -5414 + 2513=-2901

Cumulative cash flow at year 2 = -2901 + 3422 = 521

2901 / 3422 = 0.84

Payback period = 1 + 0.84 = 1.84 years