The MBA intern from a reputed institute is given the task of analyzing two mutually exclusive projects proposals at Headquarters of XALCO (An aluminium company). ...

Q.1. The MBA intern from a reputed institute is given the task of analyzing two mutually exclusive projects' proposals at Headquarters of XALCO (An aluminium company). XALCO was into manufacturing of aluminium. It had two plants; one at Bilaspur (referred as Plant B); the other at Korba (referred as Plant K). The plant managers of the two plants had submitted proposals related to the renovation (modernization) of their respected plants. The proposals provided the incremental benefits in terms of cash flow projections from the renovation of their respective plants. The logic given was that production efficiency would improve with modernization. However, XALCO could take up only one of the two projects for modernization currently as with improving the efficiency of only one of the two projects, it will be able to meet the demand for aluminium. The cash flow projections of the two proposals is provided in Table I. The initial outlay for Plant B modernization would be 3150 million and for Plant K would be 300 million. The benefit in terms of cash flows for Plant B would be 100 million starting from Year 1 and will grow at a growth rate of 4% till perpetuity and for Plant K it will be 125 million also growing at a rate of 4% till perpetuity from Year 1 onwards. Table I Plant T=0 T=1 till perpetuity with growth rate of g 4% Plant B -2150 3100 Plant K - 3300 3125 *All values in millions The cost of capital was not known. The main task of the intern was to find out the cost of capital for which XALCO would be indifferent between choosing any of the two projects. What is the cross-over rate and what should the MBA intern suggest regarding investment decision