The Copious Brewing Company (CBC) is considering two expansion plan choices. The

Question

The Copious Brewing Company (CBC) is considering two expansion plan choices. The first plan, Plan A, is to spend $50 million on a state-of-the-art large scale, green, fully integrated brewery which will provide an expected cash flow stream of $8 million per year for 20 years. The 2nd option, Plan B, is to build a less integrated, less green and less efficient facility for only $15 million which is then expected to generate $3.4 million per year for the next 20 years. The cost of capital for CBC is 10%. Which decision is the best financial decision for CBC since they cannot choose both and why?

Explanation / Answer

Hi,

Please find the answer as follows:

You need to calculate NPV in the given case:

Plan 1 = - 50 + 8*(8.5136) = 18.11 million

Plan 2 = -15 + 3.4*(8.5136) = 13.94 million

Plan 1 should be accepted as it offers a higher NPV. It is because the projects are mutually exclusive.

Thanks.

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