ou are considering opening a new plant. The plant will cost $96.2 million upfront and will take one year to build. After that, it is e 30.2 million at the end of every year of production. The cash flows are expected to last forever. Calculate the NPV of this invest apital is 8.2%. Should you make the investment? Calculate the IRR. Does the IRR rule agree with the NPV rule? lere is the cash flow timeline for this problem: Years 0 1 Cash Flow (5 million) -96.2 2 30.2 3 30.2 30.2 Forever 30.2

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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You are considering opening a new plant. The plant will cost $96.2 million upfront and will take one year to build. After that, it is expected to produce profits of
$30.2 million at the end of every year of production. The cash flows are expected to last forever. Calculate the NPV of this investment opportunity if your cost of
capital is 8.2%. Should you make the investment? Calculate the IRR. Does the IRR rule agree with the NPV rule?
Here is the cash flow timeline for this problem:
Years
Cash Flow ($ million)
0
-96.2
1
2
+
30.2
3
30.2
4
30.2
Forever
30.2
Transcribed Image Text:You are considering opening a new plant. The plant will cost $96.2 million upfront and will take one year to build. After that, it is expected to produce profits of $30.2 million at the end of every year of production. The cash flows are expected to last forever. Calculate the NPV of this investment opportunity if your cost of capital is 8.2%. Should you make the investment? Calculate the IRR. Does the IRR rule agree with the NPV rule? Here is the cash flow timeline for this problem: Years Cash Flow ($ million) 0 -96.2 1 2 + 30.2 3 30.2 4 30.2 Forever 30.2
Expert Solution
Step 1: Define=NPV

NPV is the most used method of selection of projects and is based on the time value of money and can be found as the difference between the present value of cash flow and initial investment.

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