The Pinkerton Publishing Company is considering two mutually exclusive expansion
ID: 2769536 • Letter: T
Question
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%. 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 % 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 $ What is the NPV for this Project ? Round your answer to the nearest dollar. $ What is the IRR for this Project ? Round your answer to two decimal places. %
Explanation / Answer
PROJECT A
PROJECT B
$
$
IN MILLION
INITIAL OUT FLOW
-44
-14
COST OF CAPITAL 9%
INFLOW PER YEAR
6
2.7
PRESENT WORTH OF ONE DOLLAR PER PERIOD PAYABLE AT END OF 20 YEARS
9.292244
9.292244
INFLOW IN 20 YRS
55.753464
25.089059
6 X9.292244
2.7 X9.292244
NPV
11.753464
11.089059
PROJECT A
PROJECT B
$
$
IN MILLION
INITIAL OUT FLOW
-44
-14
COST OF CAPITAL 9%
INFLOW PER YEAR
6
2.7
PRESENT WORTH OF ONE DOLLAR PER PERIOD PAYABLE AT END OF 20 YEARS
9.292244
9.292244
INFLOW IN 20 YRS
55.753464
25.089059
6 X9.292244
2.7 X9.292244
NPV
11.753464
11.089059
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