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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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