Question

Ford Motors expects a new hybrid-engine project to produce incremental cash flows of $45 million each year, and expects these to grow at 3% each year. The upfront project costs are $380 million and Ford's weighted average cost of capital is 10%. If the issuance costs for external finances are $10 million, what is the net present value (NPV) of the project? O A. $278 million O B. $253 million O C. $266 million OD. $228 million

Answer 1

Incremental cash flow = 45

Initial investment = 380

Issuance costs = 10

Total cash outflow = 380 + 10 = 390

WACC = 10%

Growth rate = 3%

Present value of cash flow = 45 / (10% - 3%)

Present value of cash flow = 643

NPV = 643 - 390

NPV = 253

Answer : B. 253