A company is considering two mutually exclusive expansion plans. Plan A requires a $40 million expenditure on
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A company is considering two mutually exclusive expansion plans. Plan A requires a $40 million expenditure on a large-scale integrated plant that would provide expected cash flows of $6.4 million per year for 20 years. Plan B requires a $12 million expenditure to build a somewhat less efficient, more labor-intensive plant with expected cash flows of $2.72 million per year for 20 years. The firms WACC is 10%.
a. Graph the NPV profiles for Plan A and Plan B and approximate the crossover rate.
b. Calculate the crossover rate where the two projects NPVs are equal.
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