Imperial Motors is considering producing its popular Rooster model in China. This will involve an initial investment of

RMB 4 billion. The plant will start production after one year. It is expected to last for 2 years and have a salvage

value at the end of this period of RMB 100 million in real terms. The plant will produce 100,000 cars a year. The firm

anticipates that in the first year, it will be able to sell each car for RMB 65,000, and thereafter the price is expected to

increase by 4% a year. Raw materials for each car are forecasted to cost RMB 18,000 in the first year, and these costs are

predicted to increase by 3% annually. 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 for 2 years at a fixed cost

of RMB 300 million a year payable at the beginning of each year. Imperials discount rate for this type of project is 10%

(nominal). The expected rate of inflation is 5%. The plant can be depreciated straight-line over the 2-year period, and

profits will be taxed at 21%. Assume all cash flows occur at the end of each year except where otherwise stated.

Question: What is the NPV of the project plant?

Multiple Choice

1,173

1,020

2,454

996

1,166

1,341