ABC Inc. has a weighted average cost of capital (WACC) of 11.10%. It is considering investing in a new project with the same riskiness as the firm. The project will generate free cash flows in year 1 of $13,650,000. The free cash flows are expected to grow by 3.70% in perpetuity. The cost of the project is $172,000,000. This cost will be incurred at time 0, today. What is the net present value (NPV) of the project?
NPV $ 12,459,459
| Step-1:Present Value of annual cash inflow | |||||
| Present Value of cash inflow | = | Year 1 Cash inflow | / | (Ke-g) | |
| = | $ 1,36,50,000 | / | (0.1110-0.0370) | ||
| = | $ 1,36,50,000 | / | 0.074 | ||
| = | $ 18,44,59,459 | ||||
| Where, | |||||
| Ke | = | WACC | = | 11.10% | |
| g | = | Growth rate in annual cash inflow | = | 3.70% | |
| Step-2:Calculation of NPV of project | |||||
| Present Value of cash inflow | $ 18,44,59,459 | ||||
| Present Value of cash outflow | $ 17,20,00,000 | ||||
| Net Present Value | $ 1,24,59,459 | ||||
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