You are considering opening a new plant. The plant will cost $99.5 million up fr

Question

You are considering opening a new plant. The plant will cost $99.5 million up front and will take one year to build. After that it is expected to produce profits of $28.2 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 7.8%. 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. The NPV of the project will be 235.9 million. (Round to one decimal place.) You should make the investment. (Select from the drop-down menu.) The IRR is %. (Round to two decimal places.) ble in the cost of capital estimate is %. (Round to two decimal places.)

Explanation / Answer

npv=(1/1+r)*(c/r)-c0

r = 7.8% =0.078

c = $28.2

C0 = 99.5

NPV = 235.9m

IRR

IRR: 0 = –99.5 + 28.2/IRR. IRR =28.2/99.5 = 28.34%. Okay as long as cost of capital does not go above 28.34%

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