Scale Differences The Pinkerton Publishing Company is considering two mutually e

Question

Scale Differences

The Pinkerton Publishing Company is considering two mutually exclusive expansion plans. Plan A calls for the expenditure of $44 million on a large-scale, integrated plant that will provide an expected cash flow stream of $6 million per year for 20 years. Plan B calls for the expenditure of $14 million to build a somewhat less efficient, more labor-intensive plant that has an expected cash flow stream of $2.7 million per year for 20 years. The firm's cost of capital is 9%.

A.) Calculate each project's NPV. Round your answers to the nearest dollar.

Project A     $____

Project B     $____

Calculate each project's IRR. Round your answers to two decimal places.

Project A     ____%

Project B     ____%

B.) Set up a Project ? by showing the cash flows that will exist if the firm goes with the large plant rather than the smaller plant.

Year

Project ? Cash Flows

0

$____

1-20

$____

C.) What is the NPV for this Project ?? Round your answer to the nearest dollar. $____

D.) What is the IRR for this Project ?? Round your answer to two decimal places. ____%

E.) Graph the NPV profiles for Plan A, Plan B, and Project ?. Select the correct graph.

Year

Project ? Cash Flows

0

$____

1-20

$____

Explanation / Answer

A and B

The Cashflows for the projects are Plan A Plan B Initial Investment $ Million -44 -14 Annual Cash flow $ Million 6 2.7 Period years 20 20 Discount Rate% 9% 9% PV of Cashflows 54.77 24.65 Using PV Function NPV 10.77 10.65 NPV = PV of cash flows -Initial Investment IRR 12.30% 7.75% Using Rate function

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