Imagine you are the CFO of ABC Motors, and are considering buying a new facility

Question

Imagine you are the CFO of ABC Motors, and are considering buying a new facility. The facility costs you $220 Million today, and would help you launch a new line for cars produced for the next 7 years. If your discount rate is 6%, based on the projected incremental net cash flows below, would you accept the project?

Year

Cash Flow

1

30 Million

2

40 Million

3

50 Million

4

60 Million

5

50 Million

6

40 Million

7

30 Million

Explanation / Answer

The "30/1.06 +40/1.06^2 + 50/1.06^3 + 60/1.06^4 +50/1.06^5 + 40/1.06^6 + 30/1.06^7" > $220 million is basically correct. That is the NPV method. If the NPV is positive, then the IRR will be greater than the discount rate so you should accept the project assuming no mutually exclusive projects have a higher IRR.

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