Question

Net Present Value

Part A

An ethanol processing facility costs $25,000 to construct and will last 5 years (it is constructed in year 0 and runs from year 1 through year 5). It produces 1000 barrels of ethanol per year and can charge a price of $10 per barrel. If the interest rate is 7%, what is the net present value of this facility?

Part B A different ethanol processing facility costs $800,000 to construct but will instead last forever. Every year (starting the year after construction), it produces 10,000 barrels of ethanol and can charge a price of $4 per barrel. At what interest rate would an investor be indifferent between constructing the facility and simply keeping the money?

Answer 1