A proposed nuclear power plant will cost $2.2 billion to build and then will produce cash flows of $300 million a year for 15 years. After that period (in year 15), it must be decommissioned at a cost of $900 million. (LO8-1 and LO8-2)

a. What is project NPV if the discount rate is 5%?

b. What if the discount rate is 18%?

a.

$480,982,023

b.

-$747,691,167

Explanation:

NPV the sum of present values of all the cash inflows and outflows associated with the project.

We need sum up the resent value of each cash flow in a formula.

Net Present value = Initial Investment + PV of yearly cash Flow + Pv of decommissioning cost

Net Present value = ($2,200,000,000) + [ $300,000,000 x ( 1 - ( 1 + r )^-15 / r] + [ $900,000,000 x ( 1 + r )^-15 ]

a.

r = 5%

Net Present value = ($2,200,000,000) + [ $300,000,000 x ( 1 - ( 1 + 5% )^-15 / 5%] + [ $900,000,000 x ( 1 + 5% )^-15 ]

Net Present value = ($2,200,000,000) + $3,113,897,411  + ($432,915,388 )

Net Present value = $480,982,023

b.

r = 18%

Net Present value = ($2,200,000,000) + [ $300,000,000 x ( 1 - ( 1 + 18% )^-15 / 18%] + [ $900,000,000 x ( 1 + 18% )^-15 ]

Net Present value = ($2,200,000,000) + $1,527,473,268   + ($75,164,435  )

Net Present value = ($747,691,167)

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