Thank you for visiting You are considering opening a new plant The plant will cost 97 7 million up front and will take one year to build After that. This page is designed to guide you through key points and clear explanations related to the topic at hand. We aim to make your learning experience smooth, insightful, and informative. Dive in and discover the answers you're looking for!
Answer :
The value of the investment and the discount rate, indicates that the NPV, the business decision, and the the IRR are;
NPV ≈ $239.2 million
Yes, the business is profitable, therefore investment should made
IRR ≈ 28.966%
What is NPV?
NPV, which is an acronym for Net Present Value, is the measure of the value of an investment, which is calculated as the present value of the expected cash flow of the investment.
The initial cost of the investment = $97.7 million
The expected cash flow = $28.3 million per year, starting from now till forever
The expected cash flow is a perpetuity. The formula for a perpetuity indicates that we get;
PV = C/r
Where;
C = The cash flow per period = $28.3 million
r = The discount rate = 8.4%
Therefore; PV = $28.3 million/0.084 = $336,904,761.905
The NPV of the investment is therefore; NPV = PV - Initial Cost = 336,904,761.905 - 97,700,000 = 239,204,761.905
- NPV ≈ $239.2 million
- The NPV is positive, indicating that the business is profitable, and therefore, should be invested in or undertaken
The Internal Rate of Return, IRR, is the discount rate that makes the makes the NPV of an investment zero.
The IRR can be found from solving for r in the equation;
0 = PV - Initial Cost 0 = C/r - Initial Cost
Which indicates; 0 = 28.3/r - 97.7
r = 28.3/97.7 ≈ 0.28966 = 28.966%
The IRR of the investment is about 28.966%
Learn more on Net Present Value (NPV) here: https://brainly.com/question/34118869
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