In November of 2006, Toyota completed the building of its truck assembly plant in San Antonio, Texas. Unfortunately, in the rush to meet construction deadlines, Toyota instructed the general contractor to not install air conditioning (A/C) in the main facility. But now the time has come for Toyota to finish the facility with the installation of A/C. Toyota's contractor has developed two alternative plans (they are mutually exclusive) for the company to consider:

Plan 1: This A/C investment would require an initial outlay of $600,000 with the following end of year net cash flows: Year 1: -$50,000; Year 2: -$50,000; Year 3: -$50,000; Year 4: -$50,000, Year 5: -$50,000.

Plan 2: This alternative plan would require a smaller initial outlay but higher yearly operating costs. The initial outlay would be $100,000 and end of year net cash flows are estimated to be: Year 1: -$175,000; Year 2: -$175,000; Year 3: -$175,000, Year 4: -$175,000; Year 5: -$175,000.

Question 1: Calculate the NPV for each plan. Assume that Toyota's WACC is 7%. Use a financial calculator to answer this question and show your keystrokes. Check figures for Plan 1: Keystrokes using the HP12C NPV keys are CF0 = -$600,000, CFj = -$50,000, Nj = 5, i = 7, so NPV for plan 1 is -$805,009.87; or using TVM keys (n=5, i=7, PV=?, PMT=-$50,000, FV=0) = -$205,009.87 plus -$600,000 = -$805,009.87.

Question 2: For mutually exclusive projects, normally the rule is to accept only the project or plan with the highest positive NPV. However, Toyota is faced with a mandatory decision to accept either plan 1 or 2, neither of which generates positive net cash flows. Which plan should Toyota accept? Explain why.

Question 3: Explain why the IRR of either plan cannot be determined.