You are considering opening a new plant. The plant will cost $96.8 million upfro

Question

You are considering opening a new plant.

The plant will cost $96.8 million upfront and will take one year to build.

After that, it is expected to produce profits of $28.1 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 7.5%. (Round to one decimal place.)

Should you make the investment?

Calculate the IRR.

Does the IRR rule agree with the NPV rule?

Below is the cash flow timeline: Years     0                  1                 2                   3                     4                            Forever

Cash Flow million)                              96.8              28.1           28.1                28.1                                               28.1

Explanation / Answer

value of the positive cash flows = 28.1/0.075 = 374.67

NPV = 374.67 - 96.8 = 277.87 million

make the investment

for IRR; 28.1/r = 96.8

r = 29.03%

yes the IRR rules agrees with the NPV rule

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