A company is considering two mutually exclusive expansion plans. Plan A requires a $39 million expenditure on a large-scale integrated plant that would provide expected cash flows of $6.23 million per year for 20 years. Plan B requires a $11 million expenditure to build a somewhat less efficient, more labor-intensive plant with an expected cash flow of $2.47 million per year for 20 years. The firm's WACC is 9%. a. 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: 24 million Calculate each project's IRR. Round your answers to one decimal place. Plan A: Plan B: % b. By graphing the NPV profiles for Plan A and Plan B, determine the crossover rate. Round your answer to one decimal place. c. Calculate the crossover rate where the two projects' NPVS are equal. Round your answer to one decimal place. %
A company is considering two mutually exclusive expansion plans. Plan A requires a $39 million expenditure on a large-scale integrated plant that would provide expected cash flows of $6.23 million per year for 20 years. Plan B requires a $11 million expenditure to build a somewhat less efficient, more labor-intensive plant with an expected cash flow of $2.47 million per year for 20 years. The firm's WACC is 9%. a. 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: 24 million Calculate each project's IRR. Round your answers to one decimal place. Plan A: Plan B: % b. By graphing the NPV profiles for Plan A and Plan B, determine the crossover rate. Round your answer to one decimal place. c. Calculate the crossover rate where the two projects' NPVS are equal. Round your answer to one decimal place. %
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Please see image for question.

Transcribed Image Text:A company is considering two mutually exclusive expansion plans. Plan A requires a $39 million expenditure on a large-scale integrated plant that would provide expected cash flows of $6.23 million per year for
20 years. Plan B requires a $11 million expenditure to build a somewhat less efficient, more labor-intensive plant with an expected cash flow of $2.47 million per year for 20 years. The firm's WACC is 9%.
a. Calculate each project's NPV. Enter your answers in millions. For example, an answer of $10,550,000 should be entered as 10.55. Do not round intermediate calculations. Round your answers to two
decimal places.
Plan A:
2$
million
Plan B:
2$
million
Calculate each project's IRR. Round your answers to one decimal place.
Plan A:
%
Plan B:
%
b. By graphing the NPV profiles for Plan A and Plan B, determine the crossover rate. Round your answer to one decimal place.
%
c. Calculate the crossover rate where the two projects' NPVS are equal. Round your answer to one decimal place.
d. Is NPV better than IRR for making capital budgeting decisions that add to shareholder value?
-Select-
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