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A project has an initial capital expenditure (capex) of $100 million and generates net income of...

A project has an initial capital expenditure (capex) of $100 million and generates net income of $9 million dollars in year 1. For the next 30 years, net income will grow 8 percent each year. The project will continue to operate indefinitely. The estimated continuation value of the project at the end of year 30 is $20 million dollars. The CCA rate on the capital expenditure is 10 percent and the marginal corporate tax rate is 20 percent. No additional capex or net working capital is required over the project’s life. If the cost of capital is 16 percent, what is the NPV?

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Expert Solution

Year 1 Year 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30
A Initial Investment -100
B Net Income - Given grows at 8% 9 9.72 10.4976 11.33741 12.2444 13.22395 14.28187 15.42442 16.65837 17.99104 19.43032 20.98475 22.66353 24.47661 26.43474 28.54952 30.83348 33.30016 35.96418 38.84131 41.94861 45.3045 48.92886 52.84317 57.07063 61.63628 66.56718 71.89255 77.64396
C Tax @20% 1.8 1.944 2.09952 2.267482 2.44888 2.644791 2.856374 3.084884 3.331674 3.598208 3.886065 4.19695 4.532706 4.895323 5.286949 5.709904 6.166697 6.660032 7.192835 7.768262 8.389723 9.060901 9.785773 10.56863 11.41413 12.32726 13.31344 14.37851 15.52879
D Income after Tax =B-C 7.2 7.776 8.39808 9.069926 9.795521 10.57916 11.4255 12.33953 13.3267 14.39283 15.54426 16.7878 18.13082 19.58129 21.14779 22.83962 24.66679 26.64013 28.77134 31.07305 33.55889 36.2436 39.14309 42.27454 45.6565 49.30902 53.25374 57.51404 62.11517
E Add : Tax on Dep 2 2 2 2 2 2 2 2 2 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
F Cash flow = D+E 9.2 9.776 10.39808 11.06993 11.79552 12.57916 13.4255 14.33953 15.3267 14.39283 15.54426 16.7878 18.13082 19.58129 21.14779 22.83962 24.66679 26.64013 28.77134 31.07305 33.55889 36.2436 39.14309 42.27454 45.6565 49.30902 53.25374 57.51404 62.11517
G Value of Business 20
H Total Cash flow (F+G) -100 9.2 9.776 10.39808 11.06993 11.79552 12.57916 13.4255 14.33953 15.3267 14.39283 15.54426 16.7878 18.13082 19.58129 21.14779 22.83962 24.66679 26.64013 28.77134 31.07305 33.55889 36.2436 39.14309 42.27454 45.6565 49.30902 53.25374 57.51404 82.11517
I Calc for PV Factor (1.16) power n of yrs 1             1.1600      1.3456      1.5609      1.8106      2.1003      2.4364      2.8262      3.2784      3.8030      4.4114      5.1173      5.9360      6.8858      7.9875      9.2655    10.7480    12.4677    14.4625    16.7765    19.4608    22.5745    26.1864    30.3762    35.2364    40.8742    47.4141    55.0004    63.8004    74.0085
J PV Factor @16% = 1/I 1                  0.86           0.74           0.64           0.55           0.48           0.41           0.35           0.31           0.26           0.23           0.20           0.17           0.15           0.13           0.11           0.09           0.08           0.07           0.06           0.05           0.04           0.04           0.03           0.03           0.02           0.02           0.02           0.02           0.01
K PV (J*H) -100 7.931034483 7.265161 6.66161 6.113822 5.616001 5.16302 4.750337 4.373923 4.030201 3.262619 3.037611 2.828121 2.633078 2.451486 2.282418 2.12501 1.978458 1.842012 1.714977 1.596703 1.486585 1.384062 1.28861 1.19974 1.116999 1.039965 0.968243 0.901468 1.109537

jeff jeffy answered 1 year ago
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