The Pinkerton Publishing Company is considering two mutually exclusive expansion

plans. Plan A calls for the expenditure of $50 million on a large-scale, integrated plant

that will provide an expected cash flow stream of $8 million per year for 20 years. Plan

B calls for the expenditure of $15 million to build a somewhat less efficient, more

Labor-intensive plant that has an expected cash flow stream of $3.4 million per year for

20 years. The firms cost of capital is 10%.

Give a logical explanation, based on reinvestment rates and opportunity costs, as to

why the NPV method is better than the IRR method when the firms cost of capital is

constant at some value such as 10%. (3 marks)