You have been asked to analyze the net present value of building a toll road in Asia.

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Question:

You have been asked to analyze the net present value of building a toll road in Asia. You estimate that building the road will cost you $80 million up front and that you will generate $ 6 million in cash flows next year and that these cash flows will grow 8% a year for the following five years (Years 2-6). After year 6, you expect the cash flows to continue to grow at the inflation rate (2%). Assuming a cost of capital of 7%, what is the NPV of this project to you?

Now assume that you believe that you can double your cash flows for the next 6years in the toll road investment described in problem 6, if you cut back on maintenance. If you do this, though, you will no longer be able to operate it as a toll road after year 6 and will have to sell it to the government for $30 million. Assuming the cost of capital remains at 7%, what is the NPV of the project to you?