Chapter 6, Problem 14PS

Project NPV Imperial Motors is considering producing its popular Rooster model in China. This will involve an initial investment of RMB 4 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 RMB 500 million in real terms. The plant will produce 100,000 cars a year. The firm anticipates that in the first year, it will be able to sell each car for RMB 65,000, and thereafter the price is expected to increase by 4% a year. Raw materials for each car are forecasted to cost RMB 18,000 in the first year, and these costs are predicted to increase by 3% annually. Total labor costs for the plant are expected to be RMB 1.1 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 RMB 300 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?