Question
A corporate treasury estimates that an investment of $ 50 million to expand themanufacturing capacity of its companys main product line would generate additionalcash flows
A corporate treasury estimates that an investment of $ 50 million to expand themanufacturing capacity of its company’s main product line would generate additionalcash flows of $ 12 million per year for 5 years. Assuming a discount rate of 8%calculate:
a) The Net Present value of the stream of returns of the expansion
b) The profitability index
c) The internal rate of return
d) Should the company proceed with the investment?
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Solution a The Net Present Value NPV of the stream of returns from the expansion can be calculated using the formula NPV CFt 1 rt Initial Investment where CFt is the cash flow in year t r is the disco...Get Instant Access to Expert-Tailored Solutions
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