. A new plant requires an initial investment of $10 million. It is expected that a supplemental investment of $4 million will be needed every 3 years to update the plant. The plant is expected to start producing products 2 years after the initial investment is made (at the start of the third year). Revenues of $5 million per year will first be realized at the end of the fourth year and each year thereafter. Annual operating and maintenance costs will be incurred once production is underway (in the third year) an are expected to be $2 million per year. The plant has a 15-year life. (a) What is the NPV of the plant if the interest rate is 10% per year, compounded annually? (b) Is the plant an economically acceptable investment (based on the NPV)? (c) What is the ROR of the plant? (d) What is the payback period for the plant?

. A new plant requires an initial investment of $10 million. It is expected that a supplemental investment of $4 million will be needed every 3 years to update the plant. The plant is expected to start producing products 2 years after the initial investment is made (at the start of the third year). Revenues of $5 million per year will first be realized at the end of the fourth year and each year thereafter. Annual operating and maintenance costs will be incurred once production is underway (in the third year) an are expected to be $2 million per year. The plant has a 15-year life. (a) What is the NPV of the plant if the interest rate is 10% per year, compounded annually? (b) Is the plant an economically acceptable investment (based on the NPV)? (c) What is the ROR of the plant? (d) What is the payback period for the plant?

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EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter11: Capital Budgeting And Risk

Section: Chapter Questions

Problem 15P

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