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 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.

A. 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: _____%

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

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

D. 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

Ans, A an B)

Year 0 1 ..... 20

Plan A -39 6.23

Plan B -13 2.91

using excel NPV, rate 9% For the 20 Years cash flow

Formula used NPV(9%,F27:F47), IRR(F27:F47)

Year	CF- A	CF- 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	$16.40	$12.44
IRR	15%	22%

A

B

NPV	$16.40	$12.44
IRR	15%	22%

Ans, C:

Rate	NPV A	NPV B
0.00%	$85.60	$45.20
1.00%	$73.42	$39.51
2.00%	$62.87	$34.58
3.00%	$53.69	$30.29
4.00%	$45.67	$26.55
5.00%	$38.64	$23.27
6.00%	$32.46	$20.38
7.00%	$27.00	$17.83
8.00%	$22.17	$15.57
9.00%	$17.87	$13.56
10.00%	$14.04	$11.77
11.00%	$10.61	$10.17
12.00%	$7.53	$8.74
13.00%	$4.76	$7.44
14.00%	$2.26	$6.27
15.00%	($0.00)	$5.21
16.00%	($2.06)	$4.25
17.00%	($3.94)	$3.38
18.00%	($5.65)	$2.58
19.00%	($7.22)	$1.84
20.00%	($8.66)	$1.17

Formula Used NPV(I29,$F$28:$F$47)-39 For A

and NPV(I29,$G$28:$G$47)-13 for B

To find the Cross over we use above table with Diff rates of A and B

the Chart is below and crossover is seen around 11.8%

Ans D:

NPV better than IRR for making capital budgeting decisions because its uses discount rate for calculations representing the project's capital costs as well as its risk

It is because IRR inherently assumes that any cash flows can be reinvested at the internal rate of return