Imperial Motors is considering producing its popular Rooster model in China. This will involve an initial investment of CNY 5.0 billion. The plant will start production after one year. It is expected to last for five years and have a salvage value at the end of this period of CNY 510 million in real terms. The plant will produce 120,000 cars a year. The firm anticipates that in the first year, it will be able to sell each car for CNY 75,000, and thereafter the price is expected to increase by 4% a year. Raw materials for each car are forecasted to cost CNY 28,000 in the first year, and these costs are predicted to increase by 3% annually. Total labor costs for the plant are expected to be CNY 2.1 billion in the first year and thereafter will increase by 7% a year. The land on which the plant is built can be rented for five years at a fixed cost of CNY 310 million a year payable at the beginning of each year. Imperial's discount rate for this type of project is 12% (nominal). The expected rate of inflation is 5%. The plant can be depreciated straight-line over the five-year period, and profits will be taxed at 25%. Assume all cash flows occur at the end of each year except where otherwise stated. What is the NPV of the project plant? Note: Do not round your intermediate calculations. Enter your answer in millions rounded to the nearest whole number. NPV
Net Present Value
Net present value is the most important concept of finance. It is used to evaluate the investment and financing decisions that involve cash flows occurring over multiple periods. The difference between the present value of cash inflow and cash outflow is termed as net present value (NPV). It is used for capital budgeting and investment planning. It is also used to compare similar investment alternatives.
Investment Decision
The term investment refers to allocating money with the intention of getting positive returns in the future period. For example, an asset would be acquired with the motive of generating income by selling the asset when there is a price increase.
Factors That Complicate Capital Investment Analysis
Capital investment analysis is a way of the budgeting process that companies and the government use to evaluate the profitability of the investment that has been done for the long term. This can include the evaluation of fixed assets such as machinery, equipment, etc.
Capital Budgeting
Capital budgeting is a decision-making process whereby long-term investments is evaluated and selected based on whether such investment is worth pursuing in future or not. It plays an important role in financial decision-making as it impacts the profitability of the business in the long term. The benefits of capital budgeting may be in the form of increased revenue or reduction in cost. The capital budgeting decisions include replacing or rebuilding of the fixed assets, addition of an asset. These long-term investment decisions involve a large number of funds and are irreversible because the market for the second-hand asset may be difficult to find and will have an effect over long-time spam. A right decision can yield favorable returns on the other hand a wrong decision may have an effect on the sustainability of the firm. Capital budgeting helps businesses to understand risks that are involved in undertaking capital investment. It also enables them to choose the option which generates the best return by applying the various capital budgeting techniques.
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