b) The ABC Co. is considering expanding its production capacity by 30%. The expansion will require Rs. 20 million initially. The net cash flow from this expansion is Rs. 4 million for the first year. The net cash flows are expected to grow at a rate of 5% each year for 4 years, but then slow to a 3% growth till the end of 6th year. The ABC Co. estimates that the cost of capital (i.e., required return) for this expansion is 8%.


iii. IRR of the investment project.

iv. Assuming that the cost of capital in this industry has changed to 15%, advise the equipment manufacturer whether to proceed with the selected investment project or not.


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