(33 points) nVidia is planning the production of a new GPU specialising in cryptocurrency mining. It is aiming for annual production of 15,000 GPUs over 3 years. Each GPU will have a constant real price of 2 thousand USD [use 2 in calculations] from t=0 onwards. nVidia is planning to buy new production equipment at $45,000 (real) with no salvage value, and a new facility priced at 100,000 USD (nominal) at t=0. The facility will be sold at the end of production for $100,000 (nominal). Older, fully depreciated equipment will also be used in production, which could have been sold today (t=0) for an after-tax real amount of 25,000 USD. Annual production costs are calculated at $12,000 (real), while overheads and sales expenditures are calculated at $5,000 (real) in the first year and are expected to increase at 5% per year in real terms. The tax rate is 40%, depreciation is straight-line, the cost of equity is 14%, the nominal debt rate is 5%, the target debt ratio is 30%, expected inflation is 7%, all cash flows occur at year’s end and nVidia has other profitable ongoing operations.
(i) What is the firm’s weighted average cost of capital?
(ii) What is the NPV of the project calculated using the weighted average cost of capital?