Considering building plant for initial investment

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Reference no: EM131972557

• Acme Industries is considering building a plant for an initial investment of $100 million

• If the project is built immediately, panel A shows that after a year of start-up procedures, next year’s cash flow will be $10 million, but a perpetual stream of either $15 million or $2.5 million will occur each year thereafter

• If the project is delayed, panel B shows that the first year’s initial $10 million cash flow is lost, and only the perpetual cash flows beginning two years hence will be captured

• The risk-free rate is 5% per year and assume that the return on the market portfolio will be either 30% or -20%

• What is the NPV of the project and should Acme wait one year?

Reference no: EM131972557

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