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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... blur-text-image

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