Alcoas weighted average cost of capital was around 12 percent, but its investments were earning returns closer

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Alcoa’s weighted average cost of capital was around 12 percent, but its investments were earning returns closer to 5 percent. From 2010 to 2012, Alcoa invested roughly $1 billion in capital expenditures. Suppose Alcoa spends $1 billion expanding its manufacturing facilities today, and that investment produces a net cash flow of $50 million (5 percent of $1 billion) every year in perpetuity. Calculate the NPV of that investment using a 12 percent discount rate. How much value does the $1 billion investment create or destroy? Does it seem that Alcoa should be pursuing growth in this market?

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Related Book For  answer-question

Principles Of Managerial Finance

ISBN: 9781292018201

14th Global Edition

Authors: Lawrence J. Gitman, Chad J. Zutter

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