Hindustan Motors has been producing its Ambassador car in India since 1948. Hindustan is

now considering producing the car in China. This will involve an initial investment of RMB 4 billion.

The plant will start producing after 1 year. It is expected to last for five years and have a salvage value

of at the end of this period of RMB 500 million in real terms. The plant will produce 100 000 cars per

year. The firm anticipates that in the first years it will be able to sell each car for RMB 65000 and

thereafter the price is expected to increase by 4% per year.

Raw materials for each car are forecasted to cost RMB 18000 in the first year and these costs

are expected to increase annually by 3%. Total labor costs for the plant are expected to be RMB 1.1

billion in the first year and thereafter will increase by 7% a year. The land on which the plant is built

can be rented at an annual cost of RMB 300 million per year, payable at the beginning of each year.

Hindustan typical discount rate for these kind of projects is 12% (nominal). The expected rate of

inflation is 5%. The plant will be depreciated in a straight line depreciation over the five year period

and profits will be taxed at 25%. Assume all project cash flows occur at the end of the year unless

otherwise stated. What is the NPV of the project?