You are considering opening a new plant. The plant will cost $103.9 million up front and...

You are considering opening a new plant. The plant will cost

$103.9

million up front and will take one year to build. After that it is expected to produce profits of

$30.4

million at the end of every year of production. The cash flows are expected to last forever. Calculate the NPV of this investment opportunity if your cost of capital is

7.5%.

Should you make the investment? Calculate the IRR and use it to determine the maximum deviation allowable in the cost of capital estimate to leave the decision unchanged.

Expert Solution

NPV = -Initial Investment + Present Value of Cash Flows

NPV = -103.90 + 30.40/(0.075)(1.075)

NPV = $273.15 million

Calculating IRR,

103.90 = 30.40/r(1+ r)

r = 23.66%

jeff jeffy answered 2 years ago

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