Question

A company is considering two mutually exclusive expansion plans. Plan A requires a $39 million expenditure on a large-scale integrated plant that would provide expected cash flows of $6.23 million per year for 20 years. Plan B requires a $12 million expenditure to build a somewhat less efficient, more labor-intensive plant with an expected cash flow of $2.69 million per year for 20 years. The firm's WACC is 10%. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the questions below.

1. Calculate each project's NPV. Round your answers to two decimal places. Do not round your intermediate calculations. Enter your answers in millions. For example, an answer of $10,550,000 should be entered as 10.55.

   Plan A: $  fill in the blank    million

   Plan B: $  fill in the blank million

   Calculate each project's IRR. Round your answer to two decimal places.

   Plan A: fill in the blank %

   Plan B: fill in the blank %

2. By graphing the NPV profiles for Plan A and Plan B, approximate the crossover rate to the nearest percent.

   fill in the blank %

3. Calculate the crossover rate where the two projects' NPVs are equal. Round your answer to two decimal places.

   fill in the blank %

4. Why is NPV better than IRR for making capital budgeting decisions that add to shareholder value?

Answer 1