Question
You have the following cost and revenue information on a project that invests in the conversion of a coal-fired electricity generating plan into a gas-fired
You have the following cost and revenue information on a project that invests in the conversion of a coal-fired electricity generating plan into a gas-fired unit.
Cost of new equipment: $240 million.
The equipment will be depreciated over 8 years on a straight-line basis to zero book value.
Proceeds from the sale of old equipment which has a book value of $15 m is 40 million,
Expensable installation cost: 0.50 million.
Estimated Revenue from the sale of electricity in the first year: $65 million and it remains the same for all 8 years;
Cost of gas: $25 million;
Operating and other expenses: $4 million;
Initial working capital expenses: $1 million;
Projects assets estimated resale value: $65 million.
The project is subject to a tax rate of 30%,
Anticipated clean-up expense: $1.0 million.
The investment is eligible for $1.50 million investment tax credit.
The weighted average cost of capital (WACC) of the project is 5%.
Using these data,
calculate the following cash flows associated with the project: (i) Net initial investment outlay; (ii) Net operating cash flows (NOCF) also known as CFAT and (iii) net salvage value, and
assuming the net operating cash flows will remain the same for all 8 years, calculate the NPV and the IRR of the project.
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