Question

AMD needs to fight the shortage of graphic cards and increase production.

The company has an opportunity to build a new plant.
The project costs $70 million (PV) and will take 1 year.
The cost of capital is 6% with c.c.
Plant depreciation for the 3 years in operation is 60% total.
The expected profit on increased production is $320 per card. The new plant's production capacity is 100,000 graphic cards per year, starting after 1st year and lasting for 3 years.
What is NPV?

Answer 1

The NPV of AMD's new graphic card plant can be calculated by summing the present value of the projected annual profits over the plant's operational lifetime and subtracting the initial investment. This includes revenue from card sales, depreciation costs, and discounts based on the cost of capital.

Step-by-step explanation:

To calculate the Net Present Value (NPV) for AMD's new plant, we must consider both the initial investment and the future profits adjusted for the cost of capital. The initial cost is $70 million, and expected profits from increased production are $320 per card. The plant's production capacity is 100,000 cards per year, and it will operate for 3 years after a 1-year setup period.

Let's calculate the NPV:

1. Calculate the total revenue per year: $320 * 100,000 = $32,000,000.
2. Since the plant operates for 3 years, total revenues are: 3 * $32,000,000 = $96,000,000.
3. Depreciation is 60% of $70 million, spread over 3 years: ($70 million * 0.6) / 3 = $14,000,000 per year.
4. Net profit before tax per year is: Revenue - Depreciation.
5. Discount the net profit for each year to present value using the cost of capital (6%).
6. Sum the discounted profits and subtract the initial investment to get NPV.

Note: This is a simplified example, and in practice, taxes and other operational costs should be deducted to calculate the actual profit.