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Calculating NPV and Internal Rate of Return

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You are considering opening a new plant. The plant will cost $100 million upfront and will take a year to build. After that it is expected to produce profits of $30 million at the end of every year of production. The cash flows are expected to last forever (perpetuity). Calculate the NPV of the investment opportunity if the cost of capital is 8%. Should you take 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 (compare IRR w/ capital).

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Solution Summary

Solution describes the steps to calculate NPV and IRR of a given investment proposal.

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Solution:

Discount rate=r=8%
Annual Cash inflow=C=$30
PV of perpetuity =C/r=30/8%=$375 million
But this is value at the end of year 1,

PV of cash ...

Solution provided by:
Lokesh Jain, MSc
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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