Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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You are considering building a new facility. It will cost
$98.8
million upfront. After​ that, it is expected to produce profits of
$29.3
million at the end of every year. The cash flows are expected to last forever. Calculate the NPV of this investment opportunity if your cost of capital is
8.9%.
Calculate the IRR.
 
 
 

Question content area bottom

Part 1
The NPV of this investment opportunity is
​$enter your response here
million. ​ (Round to one decimal​ place.)
 
The IRR of the project is
enter your response here​%.
Expert Solution
Check Mark
Step 1: Define of IRR

The discounting rate, or internal rate of return, brings discounted future cash flows to parity with the initial investment. In other words, it is the discounting rate at which the business will not experience a loss but will also not experience a profit. This rate is also referred to as the return on investment and the marginal efficiency of capital.

The approach of trial and error is used to achieve it. We can alternatively say that the IRR is the pace at which the project's NPV equals zero. Therefore, the present value of cash inflow minus the present value of cash outflow equals zero. If a project's internal rate of return is greater than the required rate of return or the cost of capital, the management will approve the investment.

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