Value of discounted revenues minus discounted costs: $200 Million
A study that looked at the viability of the project has already been completed at a cost of 3M.
Initial investment of $70 Million for the plant and $11 Million net working capital (NWC).
The discount rate for the firm is 7.8 for all cash flows (net cash flows from projects, recovered NWC, salvage, etc.).
Assume that both expenses and revenues for a year occur at the end of the year. NWC pays the bills during the year but has to be replenished at the end of the year.
At the end of the 10th year, the plant will be scrapped for a salvage value of $20 million and the NWC equal $11 will be recovered.
What is the NPV of the project?
Hint: Now you have to consider not only the discounted revenues minus discounted cash flows of $200 Million, but also other cash flows. Also think about which costs depend upon the project being done or not, which costs are not so dependent (aka sunk costs).