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You are considering opening a new plant.
• The plant will cost $100 million upfront. After that, it is expected to
produce profits of $30 million at the end of every year. The cash
flows are expected to last forever.
1. Calculate the NPV of this investment opportunity if your cost of
capital is 8%. Should you make the investment?
2. 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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Respuesta :

abiolataiwo2015

Answer:

1. $275 million

Yes

2. 30%

Explanation:

Calculation for the NPV of the investment opportunity

NPV = –100 + 30/0.08

NPV= $275 million

Therefore the NPV will be $275 million

Yes, Based on the above Calculation they should make the investment

2. Calculation for IRR

IRR: 0 = –100 + 30/IRR

Hence,

IRR = 30/100

IRR = 30%

Therefore the IRR will be 30%

The IRR is great only in a situation where the cost of capital does not go beyond 30%.

The NPV of the investment is . The investment should be made because it is profitable.

The IRR is 30%. The maximum deviation allowable in the cost of capital estimate to leave the decision unchanged is 30%.

What is the NPV?

Net present value is the present value of after-tax cash flows from an investment less the amount invested.

NPV = -100 + $30 / 0.08 = $275 million.

The NPV is positive. This means the project is profitable.

What is the IRR?

Internal rate of return is the discount rate that equates the after-tax cash flows from an investment to the amount invested.

IRR = -100 + 30 /1RR

100 = 30 / 1RR

IRR = 30 / 100 = 30%

To learn more about net present value, please check: https://brainly.com/question/25748668

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