Question

General Motors has a weighted average cost of capital of 10​%. GM is considering investing in a new plant that will save the company $ 40 million over each of the first two​ years, and then $ 35 million each year thereafter. If the investment is​ $150 million, what is the net present value​ (NPV) of the​ project?

A. -$ 167 million

B. $ 125 million

C. $ 209 million

D. -$ 146 million

Answer 1

The NPV is computed as shown below:

= Initial investment + Present value of future cash flows

Present value is computed as follows:

= Future value / (1 + r)ⁿ

So, the NPV is computed as follows:

= - $ 150 million + $ 40 million / 1.10 + $ 40 million / 1.10² + 1 / 1.10² x ($ 35 million / 0.10)

= - $ 150 million + $ 40 million / 1.10 + $ 390 million / 1.10²

= $ 209 million Approximately

So, the correct answer is option C.

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