Net Present Value, Rate of Return, Payback Period, Benefit-Cost Ratio

1. A new plant requires an initial investment of $10 million. It is expected that a supplemental investment of $4 million will be needed every 3 years to update the plant. The plant is expected to start producing products 2 years after the initial investment is made (at the start of the third year). Revenues of $5 million per year will first be realized at the end of the fourth year and each year thereafter. Annual operating and maintenance costs will be incurred once production is underway (in the third year) and are expected to be $2 million per year. The plant has a 15-year life.

(a) What is the NPV of the plant if the interest rate is 10% per year, compounded annually?

(b) Is the plant an economically acceptable investment (based on the NPV)?

(c) What is the ROR of the plant?

(d) What is the payback period for the plant?

2.

Additional info/hints:

(1) There are no "disbenefits" in this problem, only benefits and costs.
(2) Assume the timing of the matching federal funds is the same as the grant funds, i.e. the net outlay in grant funds by the state each year is $500,000 - $100,000 = $400,000.