Calculate the IRR

You are considering opening a new plant. The plant will cost $100 million up front and will take one year to build. After that, it is expected to produce profits of $30 million at the end of every year of production (starting two years from now). The cash flows are expected to last forever.

Calculate the NPV of this investment opportunity if your cost of capital is 8%. 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.

 

Solution: