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A company is considering two mutually exclusive expansion plans
A company is considering two mutually exclusive expansion plans. Plan A requires a $41 million expenditure on a large-scale integrated plant that would provide expected cash flows of $6.55 million per year for 20 years. Plan B requires a $12 million expenditure to build a somewhat less efficient, more labor-intensive plant with an expected cash flow of $2.69 million per year for 20 years. The firm's WACC is 9%.
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Calculate each project's NPV. Enter your answers in millions. For example, an answer of $10,550,000 should be entered as 10.55. Do not round intermediate calculations. Round your answers to two decimal places.
Plan A: $ million
Plan B: $ million
Calculate each project's IRR. Round your answers to one decimal place.
Plan A: %
Plan B: %
- By graphing the NPV profiles for Plan A and Plan B, determine the crossover rate. Round your answer to the nearest whole number.
% - Calculate the crossover rate where the two projects' NPVs are equal. Round your answer to one decimal place.
% - Is NPV better than IRR for making capital budgeting decisions that add to shareholder value?
Expert Solution
| Plan A | Plan B | |
| a) NPV | $18.79 million | $12.56 million |
| IRR | 15.00% | 22.00% |
| c) Crossover rate | 11.91% |
b) NPV profile is created with the following data. The crossover rate is determined as the point where the NPVs meet which is close to 12%. By IRR method, the Crossover rate is 11.91%
| NPV Profile | ||
| Rate | Plan A | Plan B |
| 8% | $23.31 | $14.41 |
| 9% | $18.79 | $12.56 |
| 10% | $14.76 | $10.90 |
| 11% | $11.16 | $9.42 |
| 12% | $7.92 | $8.09 |
| 13% | $5.01 | $6.90 |
| 14% | $2.38 | $5.82 |
| 15% | $0.00 | $4.84 |
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