Question

A wind turbine company is thinking of developing a new turbine, the XP9. The company estimates that creating the XP9 will require an initial investment of $125,000 today, $250,000 of engineering related costs at the end of the first year, and $49,000 of marketing costs at the end of the second year in order to be successful. However, the company estimates that sales will be increased in years 3 through 10 by $75,000 each year. The company's current cost of capital is 15 percent. a. What is the net present value of the XP9? b. What is the net present value if sales are only increased by $50,000 in years 3 through 10? c. Using the $75,000 estimate of the increase in sales, how does the net present value calculated in part a change if the cost of capital is increased to 18 percent?

Answer 1

NPV is the present value of all the cash flows.

a)

Years	Cash Flows	PV
0	-125000	-125000
1	-250000	-217391
2	-49000	-37051
3	75000	49314
4	75000	42881
5	75000	37288
6	75000	32425
7	75000	28195
8	75000	24518
9	75000	21320
10	75000	18539
NPV	-124963
Discount rate	15%

b)

Years	Cash Flows	PV
0	-125000	-125000
1	-250000	-217391
2	-49000	-37051
3	50000	32876
4	50000	28588
5	50000	24859
6	50000	21616
7	50000	18797
8	50000	16345
9	50000	14213
10	50000	12359
NPV	-209789
Discount rate	15%

c)

Years	Cash Flows	PV
0	-125000	-125000
1	-250000	-211864
2	-49000	-35191
3	75000	45647
4	75000	38684
5	75000	32783
6	75000	27782
7	75000	23544
8	75000	19953
9	75000	16909
10	75000	14330
NPV	-152422
Discount rate	18%