Ace Bandages, a French company, is considering an expansion of its manufacturing operations in Lyon. The cost of the project, to be incurred in 2009, will be €45 million. Production and sales will commence in 2010. Net cash flow for that year is projected at €3 million. Cash flows are then projected to grow by 10% a year through 2014. Thereafter, net cash flows are projected to increase by 5% a year into the foreseeable future. Ace’s WACC is 12%. What is the NPV of the project and should ACE go ahead with the project?

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Question though. Math is math in any country, but what is WACC?

It really seems like a home work assignment for me, so I would not calculate it for you, but I'll explain how to calculate npv..

WACC is the weighted average cost of capital.. it basically the cost incurred when you use your capital. If your capital source from bank loan, than the cost is the interest rate.. if it's from owner equity than the cost is the investor's expected return.. Since the WACC has already given, than we don't have to calculate it anymore..

NPV basically about the time value of money, people believe that $1 today has different value with $1 in, let'say, 50 years a go.. one of the reason is due to inflation.. therefore, before deciding whether a project is feasible, we have to calculate the net present value of all the cost and returns generated from the project.

First, you have to calculate the outflow & inflow and arrange it periodically. The period of cost incurred is refer to year 0 or present (in this case 2009).. than you arrange the inflow from 2010-2014 (refer to year1-5) and the inflow from 2015 to perpetuity, which we will refer as terminal value..

I'll illustrate it for you.. u were planning to open a restaurant, the initial cost is $100000, so the there will be an outflow at year 0 recorded as -100000 in cash flow (negative cash flow refer to outflow).. let's pretend that you would only open the restaurant for 2 years.. and u estimate the revenue generated would be $75000 annually.. if we ignored the concept of time value of money, we simply calculate the profit by adding up all the income and subtract it with the investment cost, and we will got the profit of $50000.. and of course you will go ahead with this project, since it gave u positive profit..

the concept of npv is quite similar with it, except for each future year cash flow we have to multiply it first with the discount factor (the formula is: [1/(1+k)^n], where k= discount rate =wacc and n = how far the period is from the present -> year 1 : n=1; year 2 -->n=2, etc). After we multiply each cash flow, it means we have calculate the present value of each of it. The sum of all the cash flow (inflow minus outflow) has to be higher than 0. cause if not, it means the project generate negative profit.

for terminal value, you could calculate it using this formula:
NPV TV = [CF TV/(k-g)]/(1+k)^n
in your case: CF TV is income at 2015, k = WACC, g=terminal growth =5%, n=5

so NPV of your project = -CF 2009 + total NPV year 2010 to 2014 + NPV TV

NPV>0 --> go ahead with the project

if you want to learn more about this concept, you could read in engineering economy or financial management text books