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Should You Take the Investment Opportunity?

Problem: 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 investment 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.

Solution Preview

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 investment opportunity if your cost of capital is 8%. Should you make the investment? Calculate the IRR and use it to determine the maximum deviation ...

Solution Summary

In about 330 words, including the required equation, this solution is comprised of a detailed explanation to calculate the NPV and IRR for a new $100 million plant. Then an interpretation of the results obtained is provided to make a comment on whether the investment opportunity is advantageous.

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