Question

You are considering opening a new plant. The plant will cost $105.1 on up front and will take one year to bud. Aterras pected to produce profits of $30 2 dion at the end of every year of production the cash flows are expected to forever won the NPV this invent oportunity if your cost of caps 7.2%. Should you make the remont Calculate the IRR and use it to determine the minimum deviation alowable in the cost of capit a leve the decision unchanged The NPV of the project wit milion (Pound to one omal place) You make the investment Select from the crop-down menu.) The found to two decal places) The maximum deviation slowable in the cost of capital estimates (Round to wom al places.)

you are considering opening a new plant. The plant will cost $103.1 million upfront and will take one year to build. After that it is expected to produce profits of $30.2 million at the end of every year of production. The cash flow's are expected to last forever. Calculate the NPV of this investment opportunity if your cost of capital is 7.2%. 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.

Answer 1

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

B Initial cost of plant Annual Cash flows (indefinitely) Cost of capital ($ in millions) $103.1 $30.2 7.20% - no 002 1 NPV of the Project $316.34 2 You should make the investment 3 IRR 29.29% 4 Maximum allowable deviation in cost of capital 22.09%

Cell reference -

B ($ in millions) Initial cost of plant Annual Cash flows (indefinitely) Cost of capital 103.1 30.2 0.072 NPV of the Project =C3/04-C2 6 1 7 8 2 You should make the investment 9 10 3 IRR =C3/C2 11 Maximum allowable deviation in cost of capital =C10-C4 124 13 14

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