scale differences A company is considering two mutually exclusive expansion plan
ID: 2672703 • Letter: S
Question
scale differencesA 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%.
Calculate each project's NPV. Round your answer to two decimal places.
Plan A $14 million
Plan B $11.77 million
Calculate each project's IRR. Round your answer to two decimal places.
Plan A 15.0%
Plan B 21.96%
Graph the NPV profiles for Plan A and Plan B and approximate the crossover rate to the nearest percent.
1. ____________% THIS ANSWER IS NOT 22.2% OR 11.31%
Calculate the crossover rate where the two projects' NPVs are equal. 11.26%
Explanation / Answer
years
A
years
B
0
-40
1
-40
0
-12
1
-12
1
$6.40
0.90909
5.818
1
$2.72
0.9091
2.473
2
$6.40
0.82645
5.289
2
$2.72
0.8264
2.248
3
$6.40
0.75131
4.808
3
$2.72
0.7513
2.044
4
$6.40
0.68301
4.371
4
$2.72
0.683
1.858
5
$6.40
0.62092
3.974
5
$2.72
0.6209
1.689
6
$6.40
0.56447
3.613
6
$2.72
0.5645
1.535
7
$6.40
0.51316
3.284
7
$2.72
0.5132
1.396
8
$6.40
0.46651
2.986
8
$2.72
0.4665
1.269
9
$6.40
0.4241
2.714
9
$2.72
0.4241
1.154
10
$6.40
0.38554
2.467
10
$2.72
0.3855
1.049
11
$6.40
0.35049
2.243
11
$2.72
0.3505
0.953
12
$6.40
0.31863
2.039
12
$2.72
0.3186
0.867
13
$6.40
0.28966
1.854
13
$2.72
0.2897
0.788
14
$6.40
0.26333
1.685
14
$2.72
0.2633
0.716
15
$6.40
0.23939
1.532
15
$2.72
0.2394
0.651
16
$6.40
0.21763
1.393
16
$2.72
0.2176
0.592
17
$6.40
0.19784
1.266
17
$2.72
0.1978
0.538
18
$6.40
0.17986
1.151
18
$2.72
0.1799
0.489
19
$6.40
0.16351
1.046
19
$2.72
0.1635
0.445
20
$6.40
0.14864
0.951
20
$2.72
0.1486
0.404
Net Present Value
$14
Net Present Value
$11
(a) As per NPV we select ( A) because Higher NPV is at A
Calculating Internal Rate of Return (IRR) using Ms-Excel “Spread sheet”
A
B
Year
Cash flows
Year
Cash flows
0
($40)
0
-12
1
$6.40
1
$2.72
2
$6.40
2
$2.72
3
$6.40
3
$2.72
4
$6.40
4
$2.72
5
$6.40
5
$2.72
6
$6.40
6
$2.72
7
$6.40
7
$2.72
8
$6.40
8
$2.72
9
$6.40
9
$2.72
10
$6.40
10
$2.72
11
$6.40
11
$2.72
12
$6.40
12
$2.72
13
$6.40
13
$2.72
14
$6.40
14
$2.72
15
$6.40
15
$2.72
16
$6.40
16
$2.72
17
$6.40
17
$2.72
18
$6.40
18
$2.72
19
$6.40
19
$2.72
20
$6.40
20
$2.72
15%
22%
IRR = 15%
IRR = 22%
NPV is the best method in selecting mutually exclusive products
years
A
years
B
0
-40
1
-40
0
-12
1
-12
1
$6.40
0.90909
5.818
1
$2.72
0.9091
2.473
2
$6.40
0.82645
5.289
2
$2.72
0.8264
2.248
3
$6.40
0.75131
4.808
3
$2.72
0.7513
2.044
4
$6.40
0.68301
4.371
4
$2.72
0.683
1.858
5
$6.40
0.62092
3.974
5
$2.72
0.6209
1.689
6
$6.40
0.56447
3.613
6
$2.72
0.5645
1.535
7
$6.40
0.51316
3.284
7
$2.72
0.5132
1.396
8
$6.40
0.46651
2.986
8
$2.72
0.4665
1.269
9
$6.40
0.4241
2.714
9
$2.72
0.4241
1.154
10
$6.40
0.38554
2.467
10
$2.72
0.3855
1.049
11
$6.40
0.35049
2.243
11
$2.72
0.3505
0.953
12
$6.40
0.31863
2.039
12
$2.72
0.3186
0.867
13
$6.40
0.28966
1.854
13
$2.72
0.2897
0.788
14
$6.40
0.26333
1.685
14
$2.72
0.2633
0.716
15
$6.40
0.23939
1.532
15
$2.72
0.2394
0.651
16
$6.40
0.21763
1.393
16
$2.72
0.2176
0.592
17
$6.40
0.19784
1.266
17
$2.72
0.1978
0.538
18
$6.40
0.17986
1.151
18
$2.72
0.1799
0.489
19
$6.40
0.16351
1.046
19
$2.72
0.1635
0.445
20
$6.40
0.14864
0.951
20
$2.72
0.1486
0.404
Net Present Value
$14
Net Present Value
$11
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