Question

Ford Motors expects a new hybrid-engine project to produce incremental cash flows of $60 million each year, and expects these to grow at 4% each year. The upfront project costs are $420 million and Ford's weighted average cost of capital is 10%. If the issuance costs for external finances are $15 million, what is the net present value (NPV) of the project? O A. $509 million OB. $565 million O C. $593 million OD. $622 million

Answer 1

Incremental cash flow = 60

Initial investment = 420

Issuance costs = 15

Total cash outflow = 420 + 15 =435

WACC = 10%

Growth rate = 4%

Present value of cash flow = 60 / (10% - 4%)

Present value of cash flow = 1000

NPV = 1000 - 435

NPV = 565

Answer : B. 565