Problem
Company A want to invest in production of new project.
This investment is forecasted to start earning $50,000,000 of revenue in the 2nd year, increasing by 10% p.a. every year and earn 5 years worth of revenue.
Variable operating costs are 20% of annual revenue and fixed costs in each year of operation of $1,000,000.
The project is expected to earn 5 years worth of revenue, after that it is sold at the price of $10,000,000
Setting up price: $30,000,000 today, and $10,000,000 in the 1st year.
60% of company A's capital is financed throught debt, cost of 7% and shareholders want a 6% premium on what creditors earn
Calculate NPV and IRR of the project.