Amazon.com Inc. (AMZN) is considering two mutually exclusive expansion plans. Plan A calls for the expenditure of $200 million on a large-scale, integrated plant in Bear, Delaware that will provide an expected cash flow stream of $55 million per year for 18 years. Plan B calls for the expenditure of $120 million to build a somewhat less efficient, more labor-intensive plant that has an expected cash flow stream of $38 million per year for 18 years. The firm's cost of capital is 11 percent. (The NPV and IRR numbers below are correct.)

NPV IRR

Plan A $223.6 27.1%

Plan B $172.7 31.4%

Plan C ______ ______

1. Consider the NPV and IRR for Plans A and B shown above. What causes the ranking disparity between the two methods above as to which plant should be selected.
2. Set up a Project C by showing the cash flows (difference between A and B) that will exist if the firm goes with the large plant rather than the smaller plant. What are the NPV and IRR for this Project C? Place them in the chart above.
3. What is the crossover rate between Project A and B?
4. Give a logical (applied not theoretical) explanation as to why the NPV method is a better choice than the IRR method in this case, assuming that the firm's cost of capital is constant and there is no constraint on capital.