Question

NPV profiles: scale differences 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 $13 million expenditure to build a somewhat less efficient, more labor-intensive plant with an expected cash flow of $2.91 million per year for 20 years. The firm's WACC is 10%. 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 $ million Plan B $ million Calculate each project's IRR. Round your answer to two decimal places. Plan A % Plan B % By graphing the NPV profiles for Plan A and Plan B, approximate the crossover rate to the nearest percent. % Calculate the crossover rate where the two projects' NPVs are equal. Round your answer to two decimal places. % Why is NPV better than IRR for making capital budgeting decisions that add to shareholder value? The input in the box below will not be graded, but may be reviewed and considered by your instructor.

Answer 1

Year		Plan A		Plan B
0		-39		-13
1		6.23		2.91
2		6.23		2.91
3		6.23		2.91
4		6.23		2.91
5		6.23		2.91
6		6.23		2.91
7		6.23		2.91
8		6.23		2.91
9		6.23		2.91
10		6.23		2.91
11		6.23		2.91
12		6.23		2.91
13		6.23		2.91
14		6.23		2.91
15		6.23		2.91
16		6.23		2.91
17		6.23		2.91
18		6.23		2.91
19		6.23		2.91
20		6.23		2.91
NPV		14.0395		11.77447
IRR		15.00%		21.96%

Year		Plan A		Plan B
0		-39		-13
1		6.23		2.91
2		6.23		2.91
3		6.23		2.91
4		6.23		2.91
5		6.23		2.91
6		6.23		2.91
7		6.23		2.91
8		6.23		2.91
9		6.23		2.91
10		6.23		2.91
11		6.23		2.91
12		6.23		2.91
13		6.23		2.91
14		6.23		2.91
15		6.23		2.91
16		6.23		2.91
17		6.23		2.91
18		6.23		2.91
19		6.23		2.91
20		6.23		2.91
NPV at		Plan A		Plan B
1.0%		$    73.42		$    39.51
2.0%		$    62.87		$    34.58
3.0%		$    53.69		$    30.29
4.0%		$    45.67		$    26.55
5.0%		$    38.64		$    23.27
6.0%		$    32.46		$    20.38
7.0%		$    27.00		$    17.83
8.0%		$    22.17		$    15.57
9.0%		$    17.87		$    13.56
10.0%		$    14.04		$    11.77
11.0%		$    10.61		$    10.17
12.0%		$       7.53		$       8.74
13.0%		$       4.76		$       7.44
14.0%		$       2.26		$       6.27
15.0%		$     -0.00		$       5.21
16.0%		$     -2.06		$       4.25

As we can see approximately crossover is between 11% and 12%