Assume you have completed a capital budgeting analysis of bu

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 6%. What is the new NPV of the project, after incorporating the effect of the opportunity cost?

Solution

Year Cash Flow PV 6 % Present Value 0 -$100.00 1 -$100.00 1 $13.20 0.94340 $12.45 2 $13.20 0.89000 $11.75 3 $13.20 0.83962 $11.08 NPV -$64.72 million After tax Revenue = $22 x 1-40% $13.20