Hindustan Motors has been producing its Ambassador car in India since 1948.

As the
company’s Web site explains, the Ambassador’s “dependability, spaciousness and comfort
factor have made it the most preferred car for generations of Indians.” Hindustan is now
considering producing the car in China.This will involve an initial investment of RMB 4
billion. The plant will start production after one year. It is expected to last for five years
and have a salvage value at the end of this period of RMB 500 million in real terms. The
plant will produce 100,000 cars a year.
The firm anticipates that in the first year it will be able to sell each car for RMB 65,000, and thereafter
the price is expected to increase by 4% a year. Raw materials for each car are forecasted to cost
RMB 18,000 in the first year and these costs are predicted to increase by 3% annually.
Total labor costs for the plant are expected to be RMB 1.1 billion in the first year and thereafter will
increase by 7% a year. The land on which the plant is built can be rented for five years at a fixed cost of RMB
300 million a year payable at the beginning of each year. Hindustan’s discount rate for this
type of project is 12% (nominal).
The plant can be depreciated straight-line over the five-year period and profits will be taxed at 25%. Assume
all cash flows occur at the end of each year except where otherwise stated. What is the NPV
of the plant?
 and thereafter
sted to cost

hereafter will
s at a fixed cost of RMB

e taxed at 25%. Assume