Question

Valero Energy Corp. is considering purchasing a refinery that has an unknown initial cost. The project will generate a positive cash flow of $75,000 at the end of each of the next 20 years . The project has a WACC of 12% and an lRR of 14%.

What is the project NPV? a. $ 96,110 b. $ 496,735 c. $ 560,208 d. $ 63,473 e. $ 78,309

Answer 1

Given about Valero Energy Corp.'s project,

Annual cash flow for 20 years CF = $75000

WACC = 12%

IRR = 14%

So, initial cost of the project can be calculated using IRR as interest rate. At rate = IRR, NPV of the project is 0 and initial cost equals the Present value of future cash flows,

So, Initial cost = present value of future cash flow = CF*(1 - (1+r)^-T)/r = 75000*(1 - 1.14^-20)/0.14 = $496734.79

So, initial cost of the project = $496734.79

At WACC = 12%, NPV is present value of future cash flow at WACC - initial cost

=> NPV = Present value of future cash flow at WACC - initial cost

So, Present value of future cash flow at WACC = 75000*(1 - 1.12^-20)/0.12 = $560208.27

So, NPV = 560208.27 - 496734.79 = $63473.48 or approx $63473

So, option d is correct.