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
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 $12 million expenditure to build a somewhat less efficient, more labor-intensive plant with an expected cash flow of $2.69 million per year for 20 years. The firm's WACC is 10%. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the questions below.
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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.
Plan A: $ fill in the blank million
Plan B: $ fill in the blank million
Calculate each project's IRR. Round your answer to two decimal places.
Plan A: fill in the blank %
Plan B: fill in the blank %
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By graphing the NPV profiles for Plan A and Plan B, approximate the crossover rate to the nearest percent.
fill in the blank %
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Calculate the crossover rate where the two projects' NPVs are equal. Round your answer to two decimal places.
fill in the blank %
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Why is NPV better than IRR for making capital budgeting decisions that add to shareholder value?
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