Question
A company is considering two mutually exclusive expansion projects. Plan A requires a 19 million expenditure on a large scale integrated plant that would provide
A company is considering two mutually exclusive expansion projects. Plan A requires a 19 million expenditure on a large scale integrated plant that would provide expected cash flows of $6.5 million per year for 5 years. Plan B requires a $5.5 million expenditure to build a somewhat less efficient, more labor-intensive plant with expected cash flows of $2.5 million per year for 5 years. The firms WACC is 16%. (Timeline required)
a. Calculate each projects NPV and IRR. Which project would you choose?
b. Calculate the crossover rate at which the NPVs of the two projects are equal. c. Based on your answer to part b, explain when there will be a conflict between NPV and IRR in ranking the mutually exclusive capital budgeting projects.
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