Reference no: EM133153912

Question - Joan is considering opening a new plant. The plant will cost $200 million upfront. After that, it is expected to produce profits of $30 million in the first year, and $50 million each year for the following 6 years.

Suppose that, instead of paying the initial $200 million now, Joan decides to pay it in equal instalments over the next 5 years. How much would Joan need to pay each year to make all these payments be worth $200 million today?

Now assume that an alternative project would generate immediate (time zero) net profits of $200 million upfront, but after that, you would incur net losses of $30 million in the first year, and $50 million each year for the following 6 years. The cost of capital is 8% and the IRR is 10%. Should you start this project? Explain your reasoning.