You am oarede rg opeing a re-plant The par, wil S07.7 decision unchanged the NpV
ID: 2790031 • Letter: Y
Question
You am oarede rg opeing a re-plant The par, wil S07.7 decision unchanged the NpV of this investment opportunity f your cost ofcaptul 7 million up front and will take one year to build Aher tht & is expected to produce profits of $30.3 mition a the and of every year of and wil take 83%,Soll you make nvestrrerr? Calculate the liand use it to determ e tho mai m devation alowable inte cost of capt' estimate 'o Inavo the make the investment. (Select om the drop down en The RR is%.(Round to two duma" places ) Round to two decimal places)Explanation / Answer
initial investment = 97.7 million
cash flow per year = 30.3 million
cost of capital = 8.3%
present value of perpetuity = Cash flow per year/interest rate
=>
NPV = -intital investment + PV of cash flows
= -97.7 million + 30.3million/0.083
= 267.4 million
since NPV is postive , invest in the project
IRR is the rate at which NPV is zero
=>
0 = -97.7 million + 30.3million/IRR
=>
IRR = 30.3/97.7 = 31.01%
maximum deviation allowable = 31.01% -8.3% = 22.71%
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