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 $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%. 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.

Open spreadsheet

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: $   million

   Plan B: $   million

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

   Plan A: %

   Plan B: %

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

   %

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

   %

4. 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

	Plan A	Plan B
a. NPV	$ 14.04 million	$11.77 million
IRR	15.00%	21.96%

PART B:

NPVs at different rate are as follows

b	Rate	Plan A	Plan B
	1%	73.42	39.51
	3%	53.69	30.29
	5%	38.64	23.27
	7%	27.00	17.83
	9%	17.87	13.56
	11%	10.61	10.17
	13%	4.76	7.44
	15%	0.00	5.21
	17%	-3.94	3.38
	19%	-7.22	1.84

c:

Crossover rate

11.26%

d: NPV is better than IRR because it shows the dollar amount of value added rather than a percentage of return. This shows the actual value that will be added to the project and so it is a better measure while comparing projects.

NPV Profile graph and workings attached