You have the following cost and revenue information on a project that invests in the conversion...

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Finance

You have the following cost and revenue information on aproject that invests in the conversion of a coal-fired electricitygenerating plan into a gas-fired unit.
Cost of new equipment: $200million.
The equipment will be depreciated over8 years on a straight-line basis to zero book value.
Proceeds from the sale of oldequipment which has a book value of $15 m is 40 million,
Expensible installation cost: 0.50million.
Estimated Revenue from the sale ofelectricity in the first year: $65 million and it remains the samefor all 5 years;
Cost of gas: $25 million;
Operating and other expenses: $4million;
Initial working capital expenses: $1million;
Project’s assets estimated resalevalue: $65 million.
The project is subject to a tax rateof 30%,
Anticipated clean-up expense: $1.0million.
The investment is eligible for $1.0million investment tax credit.
The weighted average cost of capital(WACC) of the project is 5%.
Using these data,
calculate the following cash flows associated with the project:(i) Net initial investment outlay; (ii) Net operating cash flows(NOCF) also known as CFAT and (iii) net salvage value, and
assuming that the net operating cash flows will remain the samefor all five years, calculate the NPV and the IRR of theproject.
Please show all work

Answer & Explanation Solved by verified expert

3.8 Ratings (603 Votes)

i Net initial investment outlay A Cot of equipment 200000000 B Proceeds from sale of equipment 40000000 C Book value of old equipment 15000000 DBC Gain on sale of old equipment 25000000 E Tax rate 30 FDE Tax on gain onsale of old equipment 7500000 GBF Net cash flow from sale of old equipment 32500000 H Expensible installation cost 500000 I Initial See Answer

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You have the following cost and revenue information on aproject that invests in the conversion of a coal-fired electricitygenerating plan into a gas-fired unit.Cost of new equipment: $200million.The equipment will be depreciated over8 years on a straight-line basis to zero book value.Proceeds from the sale of oldequipment which has a book value of $15 m is 40 million,Expensible installation cost: 0.50million.Estimated Revenue from the sale ofelectricity in the first year: $65 million and it remains the samefor all 5 years;Cost of gas: $25 million;Operating and other expenses: $4million;Initial working capital expenses: $1million;Project’s assets estimated resalevalue: $65 million.The project is subject to a tax rateof 30%,Anticipated clean-up expense: $1.0million.The investment is eligible for $1.0million investment tax credit.The weighted average cost of capital(WACC) of the project is 5%.Using these data,calculate the following cash flows associated with the project:(i) Net initial investment outlay; (ii) Net operating cash flows(NOCF) also known as CFAT and (iii) net salvage value, andassuming that the net operating cash flows will remain the samefor all five years, calculate the NPV and the IRR of theproject.Please show all work