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BLACKWATER PLC
(a) Calculation of NPV
EV = (0.3 × 0.50) + (0.5 × 1.40) + (0.2 × 2.0)
= 0.15 + 0.70 + 0.40 = 1.25 (i.e.) $ 1.25m
To conclude the NPV of the project Blackwater must weigh the present value of the costs incurred that is the outlay and the increased production costs against the benefits in the form of the two sets of tax reliefs relating to the increased operating costs and to the writing-down allowance and also the present value of the fines avoided. These are put out in the following table.
Since the negative NPV surpass the expected present value of the fines ($1~250m) over the same period it appears that the project is not viable in financial terms (that is ) it is cheaper to risk the fines.
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