Question 4. Finest City Oil Corp. is considering a fracking project in Balboa Park. The project requires an investment of $55 million and generates revenues of $250 million per year in years 1 and 2. Production costs and working capital requirements are 70% and 20% of revenues, respectively. Working capital is recovered at year 2, and a cleanup cost of $80 million is paid at year 3.

For tax purposes, the initial investment is depreciated straight-line for two years to an ending book value of $5 million, and the cleanup cost is treated as SG&A at year 3. The tax rate is 35% and the OCC (opportunity cost of capital) is 13%. What is the NPV of this project?

The solution is:

a. NPV = 0.9997

How do I get this answer? Thank you!