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7. Assume you have completed a capital budgeting analysis of building a new plant on land...

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7. Assume you have completed a capital budgeting analysis ofbuilding a new plant on land you own, and the project's NPV is $100million. You now realize that instead of building the plant, youcould build a parking garage, and would generate a pre tax revenueof $17 million. The project would last 3 years, the corporate taxrate is 40%, and the WACC is 12%. What is the new NPV ofthe project, after incorporating the effect of theopportunity cost?

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4.0 Ratings (858 Votes)

Computation of opportunity cost
i ii iii iv=ii*iii
year Cash flow Post tax cash flow PVIF @ 12% present value
1 17 10.2            0.8929          9.11
2 17 10.2            0.7972          8.13
3 17 10.2            0.7118          7.26
      24.50
Opportunity cost =       24.50
therefore
new NPV of the project, after incorporating the effect of the opportunity cost
=100-24.5=       75.50 mil
ans =       75.50 mil

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Transcribed Image Text

7. Assume you have completed a capital budgeting analysis ofbuilding a new plant on land you own, and the project's NPV is $100million. You now realize that instead of building the plant, youcould build a parking garage, and would generate a pre tax revenueof $17 million. The project would last 3 years, the corporate taxrate is 40%, and the WACC is 12%. What is the new NPV ofthe project, after incorporating the effect of theopportunity cost?

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