Question

Ford Motors expects a new hybrid-engine project to produce incremental cash flows of $50 million each year, and expects those to grow at 5% each year. The uplront project costs are $420 million and Ford's weighted average cost of capital is 9% If the issuance costs for external finances are $15 million, what is the not present value (NPV) of the project? O A. $734 million OB. 5856 million O C. $897 million OD. $815 million

Answer 1

Solution :- (1)

Annual Incremental Cash flows = $50 millions

Growth Rate = 5%

Compute present value of the cash flows at WACC and subtract investment costs as well as issuance costs.

PV project cash inflows = $50 / (0.09 - 0.05) = $1,250 ;

Cash outflows = 420 + 15 = 435;

NPV = $1,250 - $435 = $815 million

Therefore Correct Answer is (D)

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