The Pinkerton Publishing Company is considering two mutually exclusive expansion plans. Plan A calls for the expenditure of $50 million on a large-scale, integrated plant that will provide an expected cash flow stream of $8 million per year for 20 years. Plan B calls for the expenditure of $15 million to build a somewhat less efficient, more labor-intensive plant that has an expected cash flow stream of $3.4 million per year for 20 years. The firm's cost of capital is 10%. a. Calculate each project's NPV. Do not round intermediate calculations. Round your answers to the nearest dollar. Project A: $ Project B: $ Calculate each project's IRR. Round your answers to two decimal places. Project A: Project B: b. Set up a Project & by showing the cash flows that will exist if the firm goes with the large plant rather than the smaller plant. Round your answers to the nearest dollar. Use a minus sign to enter cash outflows, if any. Year Project & Cash Flows 0 1-20 % $ What is the NPV for this Project A? Do not round intermediate calculations. Round your answer to the nearest dollar. Use a minus sign to enter negative value, if any. $ What is the IRR for this Project A? Round your answer to two decimal places. c. Select the correct graph for the NPV profiles for Plan A, Plan B, and Project A. A The correct graph is -Select- NPV(Millions of Dollars) 150 125 100 75 50 25- A 5 10 -25+ Cost of capital(3) --50 NPV Millions of Dollar) 150 125 100 S 75+ 50 5 10 -25+ Cost of capital (%) -50 S 150 125 100 75 50 25 B 5 10 -25+ Cost of capital (3) -50 150 125 100 A 75+ 50 25 D S 10 -25+ Cost of capital(3) -50 17
The Pinkerton Publishing Company is considering two mutually exclusive expansion plans. Plan A calls for the expenditure of $50 million on a large-scale, integrated plant that will provide an expected cash flow stream of $8 million per year for 20 years. Plan B calls for the expenditure of $15 million to build a somewhat less efficient, more labor-intensive plant that has an expected cash flow stream of $3.4 million per year for 20 years. The firm's cost of capital is 10%. a. Calculate each project's NPV. Do not round intermediate calculations. Round your answers to the nearest dollar. Project A: $ Project B: $ Calculate each project's IRR. Round your answers to two decimal places. Project A: Project B: b. Set up a Project & by showing the cash flows that will exist if the firm goes with the large plant rather than the smaller plant. Round your answers to the nearest dollar. Use a minus sign to enter cash outflows, if any. Year Project & Cash Flows 0 1-20 % $ What is the NPV for this Project A? Do not round intermediate calculations. Round your answer to the nearest dollar. Use a minus sign to enter negative value, if any. $ What is the IRR for this Project A? Round your answer to two decimal places. c. Select the correct graph for the NPV profiles for Plan A, Plan B, and Project A. A The correct graph is -Select- NPV(Millions of Dollars) 150 125 100 75 50 25- A 5 10 -25+ Cost of capital(3) --50 NPV Millions of Dollar) 150 125 100 S 75+ 50 5 10 -25+ Cost of capital (%) -50 S 150 125 100 75 50 25 B 5 10 -25+ Cost of capital (3) -50 150 125 100 A 75+ 50 25 D S 10 -25+ Cost of capital(3) -50 17
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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Transcribed Image Text:The Pinkerton Publishing Company is considering two mutually exclusive expansion plans. Plan A calls for the expenditure of $50 million on a large-scale, integrated plant that will provide an expected cash flow stream of $8 million per year for 20 years. Plan B calls for the expenditure of $15 million to
build a somewhat less efficient, more labor-intensive plant that has an expected cash flow stream of $3.4 million per year for 20 years. The firm's cost of capital is 10%.
a. Calculate each project's NPV. Do not round intermediate calculations. Round your answers to the nearest dollar.
Project A: $
Project B: $
Calculate each project's IRR. Round your answers to two decimal places.
Project A:
Project B:
b. Set up a Project A by showing the cash flows that will exist if the firm goes with the large plant rather than the smaller plant. Round your answers to the nearest dollar. Use a minus sign to enter cash outflows, if any.
Project A Cash Flows
$
Year
$
܂
1-20
%
What is the NPV for this Project A? Do not round intermediate calculations. Round your answer to the nearest dollar. Use a minus sign to enter negative value, if any.
%
%
What is the IRR for this Project A? Round your answer to two decimal places.
c. Select the correct graph for the NPV profiles for Plan A, Plan B, and Project A.
The correct graph is | -select-
NPV(Millions of Dollars)
ܐ ܐ ܢ
-5
150-
125-
100-
75-
50-
25+
A
-501
A
5 10
-25+ Cost of capital (%)
25
-5
150+
125
100-
75
50
25+
B
-50
B
5 10
-25+ Cost of capital (%)
-5
150-
125-
1001 A
75
50
25
P
-50.
B
5 10
-25+ Cost of capital (%)
20
-5
150-
125
100
75
50
25
B
A
5 10
-25+ Cost of capital (%)
-50€
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