Question

You are considering an investment in a new factory that will operate for 3 years. The initial investment will be 356472. The nominal revenues at the end of Year 1 will be $250000. Revenues will grow at a real rate of 1%. Inflation will be 2%. The nominal costs at the end of Year 1 will be $30000. Costs will grow at a nominal 4% rate. The investment will depreciated on a straight line basis to zero over 3 years. It will have zero market salvage value at the end of 3 years. The required real rate of return for the investment is 8%. The tax rate is 21%.

What is the NPV of the project?

Select one:

a. $148154

b. $41211

c. $176671

d. $218151

e. $148955

Answer 1

	0	1	2	3
Nominal revenues		250000	257550	265328
{Nominal growth rate = 1.02*1.01-1 = 0.0302 =			[250000*1.0302]	[257550*1.0302]
Nominal costs		30000	31200	32448
Depreciation (356472/3)		118824	118824	118824
Nominal NOI		101176	107526	114056
Tax at 21%		21247	22580	23952
Nominal NOPAT		79929	84946	90104
Add: Depreciation		118824	118824	118824
Nominal OCF		198753	203770	208928
PVIF at 10.16% (PVIF = 1/1.1016^n)		0.90777	0.82405	0.74805
PV at 10.16+%		180422	167916	156288
Total PV	504626
Less: Initial investment	356472
NPV	148154
[Nominal interest rate = 1.08*1.02-1 = 10.16%]
Answer: Option [a] $148,154.