Question

Assume you have completed a capital budgeting analysis of building a new plant on land you own, and the project's NPV is $100 million. You now realize that instead of building the plant, you could build a parking garage, and would generate a pre tax revenue of $22 million. The project would last 3 years, the corporate tax rate is 40%, and the WACC is 9%. What is the new NPV of the project, after incorporating the effect of the opportunity cost?

Enter your answer in millions of dollars, rounded to 2 decimals, without the dollar sign. So, if your answer is 12,345.6789, just enter 12345.68.

Answer 1

i) Caluculation of NPV of Oppurtunity cost :

Annual Cash flow after tax = pre tax revenue* (1-tax rate)

= 22 million*(1-40%)

= 13.2 millions

Therefore PV of Oppurtunity cost :

PV = PMT * {1-1/(1+r)^n}/r where,   r = Interest rate &  n = time period

= 13.20 * {1-1/(1+0.09)^3}/0.09

= 13.20 * 2.53

= 33.40 Millins

NPV of Oppurtunity cost = 33.40 millions

ii) Therefore, NPV of project after Opputunity cost = 100 million - 33.40 million

= 66.60 million