Question

Question 2 (25 points): Calculate expected NPV for a min ROR 10% to evaluate the economic potential of an energy project with the following estimated costs, revenues and success/failure rates. Is this investment economically satisfactory? • To lease the land at $300k at time zero • To build and construct site for $600k by the end of year 1. It is considered 100% to happen. At the end of year 1, there is a 40% chance that project will be shelved with no salvage value and no liabilities. • At the end of year 1, there is a 60% probability that the project will be given a go ahead with an additional $400k for project completions. Then two possible outcomes: 40% probability to generate a net income of $550k per year for years 2-15 with an environmental remediation cost of $100,000 at the end of the project. 50% probability to generate a net income of $350k per year for years 2-15 with an environmental remediation cost of $100,000 at the end of the project. 10% probability to fail and sell at $350k at the end of year 2.

Answer 1

lease paid at teor -)-300,000 $ construction size ata -->) - 6 00, 000 $ - Expected cashflow for year 1 ou De Sol 90! FC 0.40x0.) + (0-6X: 4100, 0002920 3:240,000 $ 92 L'Net cash out flow at yow I am I oc - 600,000+ 240g ooo 92-960.000 eur Expected Cashflow for 20 y ecues L 02 ubah DC2_VADLO (948550, 0.007+ (0.5% 350000) Colo X350, 000) 2 430,000. Expected cash flow for 3-15 Yearso _C0.44.550,000) +10.5X350000)+(0.180) 395000 Expected remedian cost cet 15th year ago sĊ0.4x 100000) +10.5100000J t cooloxol er 90,000

Necy totou cashflow. PU Factor. 0300,000 - 360,000 0.909 - 430,000 9.826 395.000 L0.751 3.9 5000 16.683 395.000 g. 621 295000 0.564 395000 0.513 396000 10.467 395000 0.424 395000 0.386 395000 9.351 395000 10.319 395000 10.290 395000 0.263 395000- 40 200-305000 0239 NPV = {(totcu X PU Factor) cashflow * 123025475 yes this pooject is satisfactory I because it generene Positive NPV of £2,025,475 &

i hope my efforts will be fruitful to you...?