Foundation

Aegis.Sameerdutta
Posts: 8
Joined: Mon May 09, 2016 10:39 am

Foundation

Postby Aegis.Sameerdutta » Tue Oct 25, 2016 5:58 am

Is Solution incorrect as you have added scrap value at T10 when it is at the end of T20? please help

The estimated annual after-tax cash flows from a petroleum project is:
Year 1: $1.2 mn
Year 2: $1.7 mn
Year 3 to year 10: $1.9 mn
After-tax scrap value of oil extractors at the end of year 20 is $120,000
The initial cost of the investment is $ 10mn, and the required rate of return is 12%. The net present value (NPV) of the project is closest to:

Choose one answer.
a. -10, 378 Correct
b. 500,378 Incorrect
c. 531,687 Incorrect


The correct answer is A
Sol: C0= -10 mn, C01= 1.2mn, C02= 1.7mn, C03= 1.9mn, F03=7, C04= 1.9mn + 120,000, I=12
NPV= -10,378

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