Problem 6-18 Project NPV Imperial Motors is considering producing its popular Rooster model in China. This will involve an initial investment of CNY 4.8 billion. The plant will start production after one year. It is expected to last for five years and have a salvage value at the end of this period of CNY 508 million in real terms. The plant will produce 200,000 cars a year. The firm anticipates that in the first year, it will be able to sell each car for CNY 73,000, and thereafter the price is expected to increase by 4% a year. Raw materials for each car are forecasted to cost CNY 26,000 in the first year, and these costs are predicted to increase by 3% annually. Total labor costs for the plant are expected to be CNY 1.9 billion in the first year and thereafter will increase by 7% a year. The land on which the plant is built can be rented for five years at a fixed cost of CNY 308 million a year payable at the beginning of each year. Imperial's discount rate for this type of project is 14% (nominal). The expected rate of inflation is 5%. The plant can be depreciated straight-line over the five-year period, and profits will be taxed at 25%. Assume all cash flows occur at the end of each year except where otherwise stated. What is the NPV of the project plant? Note: Do not round your intermediate calculations. Enter your answer in millions rounded to the nearest whole number. NPV 7,843
Problem 6-18 Project NPV Imperial Motors is considering producing its popular Rooster model in China. This will involve an initial investment of CNY 4.8 billion. The plant will start production after one year. It is expected to last for five years and have a salvage value at the end of this period of CNY 508 million in real terms. The plant will produce 200,000 cars a year. The firm anticipates that in the first year, it will be able to sell each car for CNY 73,000, and thereafter the price is expected to increase by 4% a year. Raw materials for each car are forecasted to cost CNY 26,000 in the first year, and these costs are predicted to increase by 3% annually. Total labor costs for the plant are expected to be CNY 1.9 billion in the first year and thereafter will increase by 7% a year. The land on which the plant is built can be rented for five years at a fixed cost of CNY 308 million a year payable at the beginning of each year. Imperial's discount rate for this type of project is 14% (nominal). The expected rate of inflation is 5%. The plant can be depreciated straight-line over the five-year period, and profits will be taxed at 25%. Assume all cash flows occur at the end of each year except where otherwise stated. What is the NPV of the project plant? Note: Do not round your intermediate calculations. Enter your answer in millions rounded to the nearest whole number. NPV 7,843
Chapter11: Capital Budgeting And Risk
Section: Chapter Questions
Problem 26P
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Problem 6-18 Project NPV
Imperial Motors is considering producing its popular Rooster model in China. This will involve an initial investment of CNY 4.8 billion.
The plant will start production after one year. It is expected to last for five years and have a salvage value at the end of this period of
CNY 508 million in real terms. The plant will produce 200,000 cars a year. The firm anticipates that in the first year, it will be able to sell
each car for CNY 73,000, and thereafter the price is expected to increase by 4% a year. Raw materials for each car are forecasted to
cost CNY 26,000 in the first year, and these costs are predicted to increase by 3% annually. Total labor costs for the plant are expected
to be CNY 1.9 billion in the first year and thereafter will increase by 7% a year. The land on which the plant is built can be rented for five
years at a fixed cost of CNY 308 million a year payable at the beginning of each year. Imperial's discount rate for this type of project is
14% (nominal). The expected rate of inflation is 5%. The plant can be depreciated straight-line over the five-year period, and profits will
be taxed at 25%. Assume all cash flows occur at the end of each year except where otherwise stated. What is the NPV of the project
plant?
Note: Do not round your intermediate calculations. Enter your answer in millions rounded to the nearest whole number.
NPV
7,843
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