Question

A proposed nuclear power plant will cost $2.9 billion to build and then will produce cash flows of $370 million a year for 15 years. After that period (in year 15), it must be decommissioned at a cost of $970 million. (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations. Enter your answers in billions rounded to 3 decimal places.)

a. What is project NPV if the discount rate is 4%?

b. What if the discount rate is 16%?

Answer 1

	Answer
	Project Cost	$                 2.90	Billion
	Present Value of Cash Outflows	$         2,900.00	Million
	Period	15	Years
	Cash flows Per annum	$             370.00	Million
	Descommissioning Cost	$             970.00	Million
a	Discount Rate	4%
	Present Value of Net cash Inflows	PVAF(4%,15 Years)*370+PVF(4%,15th Year)*-970
	PVAF(4%,15 Years)	1-(1+r)^-n/r
		(1-(1.04)^-15)/0.04
		11.1184
	PVF(4%,15 Years)	1/(1+r)^n
		1/(1.04)^15
		0.5553
	Present Value of Net cash Inflows	(11.1184*370)+(0.5553*-970)
		$         3,575.17	Millions
	NPV	Present Value of net cash Inflows - Present Value of Cash Outflows
		3575.167-2900
		$             675.17	Millions
		$                 0.68	Billions
b	Discount Rate	16%
	Present Value of Net cash Inflows	PVAF(16%,15 Years)*370+PVF(16%,15th Year)*-970
	PVAF(16%,15 Years)	1-(1+r)^-n/r
		(1-(1.16)^-15)/0.16
		5.5755
	PVF(16%,15 Years)	1/(1+r)^n
		1/(1.16)^15
		0.1079
	Present Value of Net cash Inflows	(5.5755*370)+(0.1079*-970)
		$         1,958.27	Millions
	NPV	Present Value of net cash Inflows - Present Value of Cash Outflows
		1958.272-2900
		$           (941.73)	Millions
		$               (0.94)	Billions