A company is considering two mutually exclusive expansion plans. Plan A requires a $40 million expenditure on

Question:

A company is considering two mutually exclusive expansion plans. Plan A requires a $40 million expenditure on a large-scale integrated plant that would provide expected cash flows of $6.4 million per year for 20 years. Plan B requires a $12 million expenditure to build a somewhat less efficient, more labor-intensive plant with expected cash flows of $2.72 million per year for 20 years. The firm’s WACC is 10%.

a. Calculate each project’s NPV and IRR.

b. Graph the NPV profiles for Plan A and Plan B and approximate the crossover rate.

c. Why is NPV better than IRR for making capital budgeting decisions that add to shareholder value?

Capital Budgeting
Capital budgeting is a practice or method of analyzing investment decisions in capital expenditure, which is incurred at a point of time but benefits are yielded in future usually after one year or more, and incurred to obtain or improve the...