Reliable Industries is considering the construction of a power plant investment in India. Reliables analysts calculate that

Question:

Reliable Industries is considering the construction of a power plant investment in India. Reliable’s analysts calculate that the cost of building the plant is $ 600 million, and the internal rate of return (IRR) of the plant is 13%. The analysts also estimate that, given the experience of building the first plant, a second plant can be built for $ 550 million, and additional plants can be built for about $ 500 million each. The cost of capital is 16%.

a. How would you evaluate whether or not to build this power plant in India?

b. Are you evaluating a project or a strategy?

c. How does the risk associated with the power plant strategy compare with the risk associated with the individual power plants?

Internal Rate of Return
Internal Rate of Return of IRR is a capital budgeting tool that is used to assess the viability of an investment opportunity. IRR is the true rate of return that a project is capable of generating. It is a metric that tells you about the investment... Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of...