Question

The Chaplinsky Publishing Company is considering two mutually exclusive expansion plans. Plan A calls for the expenditure of $40 million on a large-scale, integrated plant that will provide an expected cash flow stream of $6.4 million per year for 20 years. Plan B calls for the expenditure of $12 million to build a somewhat less efficient, more labor-intensive plant that has an expected cash flow stream of $2.72 million per year for 20 years. Chaplin sky’s required rate of return is 10 percent.
a. Calculate each project’s NPV, IRR, and MIRR.
b. Construct the NPV profiles for both Plans A and B. Using the NPV pro-files, approximate the crossover rate.
c. 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 firm’s required rate of return is constant at some value such as 10 percent.



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  • CreatedNovember 24, 2014
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