Question

# You are considering opening a new plant. The plant will cost \$ 101.5 million up front...

You are considering opening a new plant. The plant will cost \$ 101.5 million up front and will take one year to build. After that it is expected to produce profits of \$ 29.9 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 8.1 %. 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 ​\$ nothing million.  ​(Round to one decimal​ place.) You ▼ should not should make the investment.  ​(Select from the​ drop-down menu.) The IRR is nothing​%. ​ (Round to two decimal​ places.) The maximum deviation allowable in the cost of capital estimate is nothing​%.  ​(Round to two decimal​ places.)

Solution:-

To Calculate NPV of the Project-

NPV = Present Value of cash inflows - Present Value of cash outflow

NPV =

NPV = \$267.64 Million

To Calculate IRR of the Project -

IRR is the rate where NPV of the Project is zero.

IRR = 29.46%

Okay as long as Cost of Capital does not go above 29.46%

If you have any query related to question then feel free to ask me in a comment.Thanks.

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