Homework SourseAssume 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 $16 million. The project would last 3 years, the corporate tax rate is 40%, and the WACC is 7%. What is the new NPV of the project, after incorporating the effect of the opportunity cost?
Solution
NPV of project after incorporating the effect is 25.19-100= -74.81
NPV of project after incorporating the effect is -74.81
| Calculation of NPV: | |||||
| Year | Revenue | PVF @7% | Amount | ||
| 1 | 9.6 | 0.935 | 8.972 | ||
| 2 | 9.6 | 0.873 | 8.385 | ||
| 3 | 9.6 | 0.816 | 7.836 | ||
| NPV | 25.193 | ||||
| NPV of project after incorporating the effect is 25.19-100= -74.81 NPV of project after incorporating the effect is -74.81 | |||||
| Working Note: Calculation of Revenue after tax: | |||||
| Revenue after tax= 16*(1-0.40)=16*0.6= $9.6 million |
