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Calculating NPV and IRR to Determine Maximum Deviation

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You are considering opening a new plant. The plant will cost $100 million upfront and will take one 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. Calculate the NPV of this opportunity if your cost of capital is 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.

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Solution Preview

PV of annuity that continues forever = C/r where C is the annual cash flow and r is the rate

PV of annuity = 30M/ 8% = ...

Solution Summary

This response determines whether one should make an investment.