Question

The Pinkerton Publishing Company is considering two mutually exclusive expansion plans. Plan A calls for the expenditure of $56 million on a large-scale, integrated plant that will provide an expected cash flow stream of $9 million per year for 20 years. Plan B calls for the expenditure of $12 million to build a somewhat less efficient, more labor-intensive plant that has an expected cash flow stream of $3.8 million per year for 20 years. The firm's cost of capital is 11%.

Calculate each project's NPV. Round your answers to the nearest dollar.

Project A	$
Project B	$

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

Project A	%
Project B	%

Set up a Project ? by showing the cash flows that will exist if the firm goes with the large plant rather than the smaller plant.

Year	Project ? Cash Flows
0	$
1-20	$

What is the NPV for this Project ?? Round your answer to the nearest dollar.

$

What is the IRR for this Project ?? Round your answer to two decimal places.
%

Answer 1

1]	NPV of Project A = -56,000,000+9,000,000*(1.11^20-1)/(0.11*1.11^20) =	$       1,56,69,953
	NPV of Project B = -12,000,000+3,800,000*(1.11^20-1)/(0.11*1.11^20) =	$       1,82,60,647
2]	IRR is that discount rate for which NPV = 0. It has to be
	found out by trial and error.
	Project A:
	0 = -56000000+9000000*PVIFA(irr,20)
	Solving for IRR.
	PVIFA(irr,20) = 56000000/9000000 = 6.2222
	PVIFA for n = 20 and r = 14% = 6.5504
	for r = 15% = 6.1982
	IRR = 14%+1%*(6.5504-6.2222)/(6.5504-6.1982) =	14.93%
	Project B:
	0 = -12000000+3800000*PVIFA(irr,20)
	Solving for IRR.
	PVIFA(irr,20) = 12000000/3800000 = 3.1579
	PVIFA for n = 20 and r = 31% = 3.2112
	for r = 31% = 3.1129
	IRR = 31%+1%*(3.2112-3.1579)/(3.2112-3.1129) =	31.54%
3]	SETTING UP A PROJECT:
	Year 0 - Project cash flows = 56,000,000-12,000,000 =	$     -4,40,00,000
	Year 1-20 - Project cash flows = 9,000,000-3,800,000 =	$          52,00,000
	NPV = -44000000+5200000*(1.11^20-1)/(0.11*1.11^20) =	$         -25,90,694
	IRR:
	PVIFA(irr,20) = 44000000/5200000 = 8.4615
	PVIFA for n = 20 and r = 10% = 8.5136
	for r = 11% = 7.9633
	IRR = 10%+1%*(8.5136-8.4615)/(8.5136-7.9633) =	10.09%