Assume ford motors expects a new hybrid-engine project to produce incremental cash flows of $50 million each year, and expects these to grow at 4% each year. the upfront project costs are $420 million and ford's weighted average cost of capital is 9%. if the issuance costs for external finances are $20 million, what is the net present value (npv) of the project? a) $560 million
b) $616 million
c) $588 milliond) $504 million

A) $560 million

Explanation:

First lets calculate the NPV of the cash stream by this investment,

PV Cash stream = Cash flow/ (r-g), where r = avg cost of capital and g = growth of the cash stream.

PV = 50 / (0.09 - 0.04)  = $1000 million

We assume that external finance issuance costs are payable as a part of initial outlay of the project and so,

Total initial outlay = 420 + 20 = $440 million

NPV of the project then,

NPV = 1000 - 440 = $560 million

Hope that helps.

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