Question

Assume Ford Motors expects a new hybrid-engine project to produce incremental cash flows of $50 million each year, and expects these to grow at 4% each year. The upfront project costs are $420 million and Ford's weighted average cost of capital is 9%. If the issuance costs for external finances are $20 million, what is the net present value (NPV) of the project?

	A.	$588 million
	B.	$560 million
	C.	$506 million
	D.	$616 million

Answer 1

- Incremental Cash flows (C1) = $50 million each year

Growth rate each year (g) = 4%

WACC = 9%

Calculating the present value of Incremntal Cash flows:-

Present Value =

=

So, present value of Incremntal Cash flows is $ 1000

- Upfront project costs = $420 million

Issuance costs for external finances = $ 20 million (This cost is upfront cost as it is incurred at the time of generating external finance.)

NPV of the project = Present Value of Incremental Cash flows - Upfront project costs - Issuance costs for external finances

= $1000 - $420 - $20

= $ 560 million

So, NPV of the ptoject is $ 560 million

Hence, Option B

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