Question

You go to your desk and your boss comes in. "I need you to do some work for me. Read this and tell me what you think." The assignment indicates that following" StuartCo Trains is a large Tank maker. It recently built the T123. It can carry a huge payload and is more nimble than other tanks. Initial project investments were $13B. Assume that the initial investment was paid on Dec 31, 2010. Assume that StuartCo will produce 60 Tanks per year for five years. Each Tank will be sold for $230M and total operating costs are 75% of revenues. Assume that revenues and costs occur at year-end with the first revenues (and costs) occurring on Dec 31, 2011. The assignment your boss gives you asks you to determine the NPV of the project if StuartCo's cost of capital is 11%? Calculate the NPV as of Dec 31, 2010. Ignore taxes and assume that there are no terminal year cash flows. Show your work, as appropriate and clearly state your answer

Answer 1

We must ascertain the present value of the future cash flows in order to compute the project's net present value (NPV). The project will produce 60 tanks per year for five years, and each tank will be sold for $230 million. The total operating costs are 75% of revenues. Using a discount rate of 11%, we can calculate the present value of each year's cash flows and then sum them to get the NPV.

Step-by-step explanation:

To calculate the NPV of the project, we need to determine the present value of the future cash flows. The project will produce 60 tanks per year for five years, and each tank will be sold for $230 million. The total operating costs are 75% of revenues.

First, we need to calculate the net profit per tank by subtracting the operating costs from the revenue: $230 million - 75% of $230 million = $57.5 million.

Next, we need to calculate the present value of each year's cash flows. Assuming a discount rate of 11%, we can use the formula PV = CF / (1 + r)^n, where PV is the present value, CF is the cash flow, r is the discount rate, and n is the number of years.

Using this formula, we calculate the present value of the net profit per tank for each year: PV = $57.5 million / (1 + 0.11)^n.

Add up the present values for all five years to get the NPV of the project. The NPV is the sum of the present values of each year's cash flows.