Should You Take the Investment Opportunity?
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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.
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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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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 ...
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