A company is considering two mutually exclusive expansion plans. Plan A requires

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 $11 million expenditure to build a somewhat less efficient, more labor-intensive plant with an expected cash flow of $2.47 million per year for 20 years. The firm's WACC is 9%. 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. Calculate each project's IRR. Round your answer to two decimal places. 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.

Explanation / Answer

a) NPV:

Plan A = $6.23m * PVIFA(9%,20) - $39m = $6.23m * 9.128 - $39m = $17.86m

Plan B = $2.47m * PVIFA(9%,20) - $11m = $2.47m * 9.128 - $11m = $11.55m

b)

IRR:

Plan A = PV of future cashflow at 9% = 56.87m and at 10% = 6.23 * 8.514 = $53.04m

IRR (Plan A) = 9% + (56.87 - 39 / 56.87 - 53.04) % = 13.67%

Plan B = PV of future cashflow at 9% = 22.55m and at 10% = 2.47 * 8.514 = $21.03m

IRR (Plan B) = 9% + (22.55 - 11 / 22.55 - 21.03) % = 16.60%

b) Plan A and Plan B approximate the crossover =

Plan A - Plan B = Investment = $28m , Future flows = $3.76m

Future value of cash flow at 9% = 34.32m and at 10% = $32.01m

IRR (A - B) = 9% + (34.32 - 28 / 34.32 - 32.01) % = 11.74%

c) Projects' NPVs are equal at = 6.23 * Discount Rate Value - 39 = 2.47 * Discount Rate Value - 11

So, the Discount Rate Value = 7.4468

PVIFA(12%,20) = approximate 7.4468

Thus, the crossover rate where Projects NPV equals = 12%

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