Question

A company is considering two mutually exclusive expansion plans. Plan A requires a $41 million expenditure on a large-scale integrated plant that would provide expected cash flows of $6.55 million per year for 20 years. Plan B requires a $12 million expenditure to build a somewhat less efficient, more labor-intensive plant with an expected cash flow of $2.69 million per year for 20 years. The firm's WACC is 9%. 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?

Answer 1

Solution:

The calculations are performed in the excel and formula are given

NPV

Plan A: $18.79 million

Plan B: $12.56 million

Calculate each project's IRR.

Plan A: 15.00%

Plan B: 22.00%

NPV profile is prepared in the graph and approximate crossover rate from the graph = 12%

Crossover rate when NPV is equal :

We can use goal seek function of excel to calculate the same