Question

New Flyer Industries has decided to expand its production of hybrid transit buses. The firm expects incremental cash flows of? $40 million per year for the next 10 years. The upfront cost of the expansion is? $150 million, and there are additional issuance costs for external financing of? $15 million. If the New? Flyer's WACC is? 7.5%, what is the NPV of the? project?

Answer 1

Net present value or NPV is the sum of discounted cash-flows of a project. The cash-flows are discounted at discount rate. Project is accepted if the NPV is positive otherwise it is rejected.

In the above question, Incremental cash-flows are provided. It is the additional cash-flow which is received by expansion. Initial investment is sum of upfront costs and additional issuance cost for external financing. This is calculated as below:

  

THus, initial cost will be $165 million.

WACC is the weighted cost of capital or the minimum rate of return which should be earned by the project to return for its assets. Thus it will be treated as discount rate.

Now, NPV is calculted as below:

Thus, the NPV of the project $109.564 million.

Working notes:

1) Total cash-flows is multiplies with NPV factor to get the present value of cash-flow

2)These present value are added to get the NPV.