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NPV of the project and IRR

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Please help with the following problem:

Your company is considering investing in a new plant. The initial investment is $220 million, obtainable at the end of the plant's useful life in ten years. Your company uses straight line depreciation (seven years). The net income from the project is expected to be $28 million per year. Your cost of capital is 12% and corporate tax rate is 34%.

Calculate the NPV of the project and IRR. Should project be accepted or rejected. Explain answer.

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Solution Summary

This solution shows how to calculate the net present value (NPV) and the internal rate of return (IRR) of a given project. The given values are calculated in Excel format.

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** Please see the attached file for the complete Excel formatted version of the solution **

Initial Investment (millions) 220
Depreciation (years) 7
Annual Depreciation (millions) 31.4285714286
Tax Rate 34%
Cost of Capital 12%
Net Income (millions) 28
Life ...

Solution provided by:
Gaurav Agarwal, MS
Education
  • BE, Bangalore University, India
  • MS, University of Wisconsin-Madison
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  • "Thank you, this helped a lot. I was not sure how to plug in those numbers to a formula. This was a great help. Now I have to figure out how to explain cost of capital is used in net present value analysis, and how cost of capital is used in net present value analysis. This stuff gets confusing."
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