A new pharmaceutical plant is expected to cost (FCI ) $25 million, and the revenue (R) from the sale of products is expected to be $10 million/y for the first four years of operation and $15 million/y thereafter. The cost of manufacturing without depreciation (COM) is projected to be $4 million/y for the first four years and $6 million/y thereafter. The cost of land (at the end of year zero) is $3 million, the working capital at startup (which occurs at the end of year 2) is $3 million, and the fixed capital investment is assumed to be paid out as $15 million at the end of year 1 and $10 million at the end of year 2. Yearly income starts in year 3, and the plant life is ten years after startup. The before-tax criterion for profitability is 17%. Assume the plant has no salvage value, but that the cost of land and the working capital are recovered at the end of the project life.

Draw a labeled, discrete, nondiscounted cash flow diagram for this project.

Draw a labeled, cumulative, discounted (to year zero) cash flow diagram for this project.

What is the NPV for this project? Do you recommend construction of this plant?