Question

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 9%. 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:

Plan B:

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

Plan A:

Plan B:

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

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

Answer 1

		Plan A	Plan B
	Initial Investment	$40 Million	$11 Million
	Annual Cash Flow	$6.39 Million	$2.47 Million
	Period	20 years	20 years
	Discounting Rate	9%	9%
a)	Using the PV Function in excel we will Calculate Present Value of Cash Inflows:
	Plan A
	PV(9%,20,6.39)
	$58.33
	PV Of Cash Inflow	$58.33	Million
	PV Of Cash Outflow	$40	Million
	NPV	$18.33	Million
	Plan B
	PV(9%,20,2.47)
	$22.55
	PV Of Cash Inflow	$22.55	Million
	PV Of Cash Outflow	$11	Million
	NPV	$11.55	Million
	NPV of Project A	$18.33 Million
	NPV of Project B	$11.55 Million
	To calculate IRR we use RATE Function in Excel
	Plan A
	RATE(20,6.39,-40)
	15.00%
	Plan B
	RATE(20,2.47,-11)
	22.03%
d)	Crossover Rate
	Initial Cash outflow	$40-$11	29
	Cash Flow at the end of	$6.39-$2.47	3.92	per year
	Year 1 to Year 20
	IRR comes to aprox 11.92%
	By solving this Equation we get IRR AS 11.92%
	3.92/(1+r)^1+3.92(1+r)^2…..3.92(1+r)^20-29