Question

In: Finance

A company is considering two mutually exclusive expansion plans. Plan A requires a $40 million expenditure...

A company is considering two mutually exclusive expansion plans. Plan A requires a $40 million expenditure on a large-scale integrated plant that would provide expected cash flows of $6.39 million per year for 20 years. Plan B requires a $11 million expenditure to build a somewhat less efficient, more labor-intensive plant with an expected cash flow of $2.47 million per year for 20 years. The firm's WACC is 11%.

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

    Plan A:     $   million

    Plan B:     $   million

    Calculate each project's IRR. Round your answers to one decimal place.

    Plan A:       %

    Plan B:       %

  2. By graphing the NPV profiles for Plan A and Plan B, determine the crossover rate. Round your answer to the nearest whole number.
      %
  3. Calculate the crossover rate where the two projects' NPVs are equal. Round your answer to one decimal place.
      %
  4. Is NPV better than IRR for making capital budgeting decisions that add to shareholder value?
    -Select-YesNo

Solutions

Expert Solution

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

Cell reference -


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