Question

You are considering an investment in a new factory that will operate for 3 years. The initial investment will be 414217. 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. $133569

b. $170430

c. $101234

d. $-23834

e. $100433

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 (with 4% nominal growth rate)		30000	31200	32448
Depreciation (414217/3)		138072	138072	138072
Nominal NOI		81928	88278	94808
Tax at 21%		17205	18538	19910
Nominal NOPAT		64723	69739	74898
Add: Depreciation		138072	138072	138072
Nominal OCF		202795	207812	212970
PVIF at 10.16% (PVIF = 1/1.1016^n)		0.90777	0.82405	0.74805
PV at 10.16+%		184091	171247	159312
Total PV	514650
Less: Initial investment	414217
NPV	100433
[Nominal interest rate = 1.08*1.02-1 = 10.16%]
Answer: Option [e] $100,433.