You are considering opening a new plant.The plant will cost $95.1 million upfrontand will take one year to build. After that,it is expected to produce profits of $29.2million at the end of every year ofproduction. The cash flows are expectedto last forever. Calculate the NPV of thisinvestment opportunity if your cost ofcapital is 7.4 %. Should you make theinvestment? Calculate the IRR. Does theIRR rule agree with the NPV rule?

Capital budgeting is a fundamental financial procedure in which organizations evaluate and select…

Answered: to last forever. Calculate the NPV of…

to last forever. Calculate the NPV of this investment opportunity if your cost of capital is 7.4 %. Should you make the investment? Calculate the IRR. Does the IRR rule agree with the NPV rule?

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

Section: Chapter Questions

Problem 1PS

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Concept explainers

Risk and return

Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.

Capital Asset Pricing Model

Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.

Question

You are considering opening a new plant.
The plant will cost $95.1 million upfront
and will take one year to build. After that,
it is expected to produce profits of $29.2
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 7.4 %. Should you make the
investment? Calculate the IRR. Does the
IRR rule agree with the NPV rule?

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