question 4

You have been recently hired as CFO in a firm with high potentials to expand. The first task you must deal with is the construction of a new plant. The cost of this investment is NOK800 million upfront. Then, the plant is expected to generate profits of NOK260 million every year. You can expect the cash flows to last forever.

a. Write down the timeline of cash flows. If you look at time 1 onwards, how do we define this cash flow structure?

b. What is the NPV of this investment opportunity if your cost of capital is 8%. Are you willing to build the new plant?

c. What is the IRR?

d. How much can you be wrong in your estimation of the cost of capital to leave your investment decision unchanged?