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

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?

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a Using a financial calculator we get NPV A 14486808 NPV B 11156893 IRR A 1503 IRR B 2226 b Using a ... View full answer

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