Answer :
Answer:
a.
$480,982,023
b.
-$747,691,167
Explanation:
NPV the sum of present values of all the cash inflows and outflows associated with the project.
We need sum up the resent value of each cash flow in a formula.
Net Present value = Initial Investment + PV of yearly cash Flow + Pv of decommissioning cost
Net Present value = ($2,200,000,000) + [ $300,000,000 x ( 1 - ( 1 + r )^-15 / r] + [ $900,000,000 x ( 1 + r )^-15 ]
a.
r = 5%
Net Present value = ($2,200,000,000) + [ $300,000,000 x ( 1 - ( 1 + 5% )^-15 / 5%] + [ $900,000,000 x ( 1 + 5% )^-15 ]
Net Present value = ($2,200,000,000) + $3,113,897,411 + ($432,915,388 )
Net Present value = $480,982,023
b.
r = 18%
Net Present value = ($2,200,000,000) + [ $300,000,000 x ( 1 - ( 1 + 18% )^-15 / 18%] + [ $900,000,000 x ( 1 + 18% )^-15 ]
Net Present value = ($2,200,000,000) + $1,527,473,268 + ($75,164,435 )
Net Present value = ($747,691,167)
Net present value when the discount rate is 5% is $480.98 million.
Net present value when the discount rate is 18% is $-747.69 million.
The net present value of project is the sum of the discounted cash flows of the project less the amount investment in the project.
The net present value of a project can be determined using a financial calculator.
Cash flow in year 0 = -2.2 billion
Cash flow in year 1 - 14 = 300 million
Cash flow in year 15 = 300 million - 900 million = -600 million
Net present value when the discount rate is 5% = 480.98 million
Net present value when the discount rate is 18% = -747.69 million
In order to determine the value of the NPV, input the values of cash flows into the financial calculator. Then calculate the NPV using the discount rates.
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