Question

Company A is going to make an investment of $15 billion on its new production. The production department has estimated projected volume is 100,000 units per year, variable costs per unit at $300,000, and fixed costs are $3 billion per year. The project is estimated to be for 10 years and the profits are taxed at a rate of 50%. Assume that Company A has no liability outstanding and an opportunity cost of capital of 10%.Please calculate the NPV of this project.

Answer 1

Cash outflow in Year 0 = $15 billion

Projected annual sales = 100,000 units, Variable cost = $300,000 per unit, Fixed Cost = $3 billion per year

Tax rate = 50%, useful life = 10 years, discount rate (Ke) = 10%

Net inflow per annum (before tax) = (sales unit * variable cost ) +fixed cost

= (100,000 units * $300,000 per unit) + $3 billion

= $33 billion

Net inflow per annum (after tax) =Net inflow per annum (before tax) * (1 - tax rate)

=$33 billion (1 - 0.50)

=$16.5 billion

Calculation of NPV of the project

NPV = PV of cah inflow - PV of cash outflow

=$16.5 billion * PVAF(10%, 10years) - $15 billion

=( $16.5billion * 6.1446 ) - $15 billion

=$ 86.385 billion

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