Question

A company is considering two mutually exclusive expansion plans. Plan A requires $28,000 initial expenditure on a large scale integrated plant, whereas Plan B requires $20,000 to build a somewhat less efficient but labor intensive plant. The firm’s expected WACC is 14%. The expected cash flows from both projects are listed below:

Years	Plan A	Plan B
1	7186	4660
2	8326	5476
3	7108	5266
4	6377	4743
5	6376	5403
6	5828	5012
7	5280	4620

Note: Add last three digits of your enrollment number which is 015 in each cash outflow (all seven years and not initial investment) before starting this question.

Requirements:

Take a decision on behalf of the above-mentioned firm.

1. Find the payback period for Plan A and Plan B. According to the payback criterion, which project should be accepted if the firm’s maximum acceptable payback is 4 years?
2. Hurdle rate for IRR is 15%. Which project should be accepted?
3. Also find NPV and PI of both projects.

Answer 1