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Determine the Net Present Value of the project on 1st January 2022

Determine the Net Present Value of the project on 1st January 2022

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question 2 Jeanius ple is considering an investment of £10 million in a new trouser production plant. The project business plan is based on the following assumptions: • The project will start on 1st January 2022. The initial investment is assumed to be incurred at the start of the project. • Production will start on 1st Jannuary 2024 and run indefinitely. • Production will be 2 million pairs of trousers each year for the first 5 years and then increased to 4 million pairs. Profits will be £0.75 per pair of trousers to be received at the end of each calendar year. Profits increase by 2% each year starting in the second year of production. • The plant will incur production and maintenance costs of £500,000 at the beginning of each year for ten years after start of production. From the eleventh year onwards, production costs will increase by 3% each year. Determine the Net Present Value of the project on 1st January 2022 at an effective interest rate of 5% per annum. Do not use Excel or any other software.
Transcribed Image Text:Question 2 Jeanius ple is considering an investment of £10 million in a new trouser production plant. The project business plan is based on the following assumptions: • The project will start on 1st January 2022. The initial investment is assumed to be incurred at the start of the project. • Production will start on 1st Jannuary 2024 and run indefinitely. • Production will be 2 million pairs of trousers each year for the first 5 years and then increased to 4 million pairs. Profits will be £0.75 per pair of trousers to be received at the end of each calendar year. Profits increase by 2% each year starting in the second year of production. • The plant will incur production and maintenance costs of £500,000 at the beginning of each year for ten years after start of production. From the eleventh year onwards, production costs will increase by 3% each year. Determine the Net Present Value of the project on 1st January 2022 at an effective interest rate of 5% per annum. Do not use Excel or any other software.
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