The Pinkerton Publishing Company is considering two mutually exclusive expansion plans. Plan A calls for the expenditure of $47 million on a large-scale, integrated plant that will provide an expected cash flow stream of $7 million per year for 20 years. Plan B calls for the expenditure of $13 million to build a somewhat less efficient, more labor-intensive plant that has an expected cash flow stream of $3.1 million per year for 20 years. The firm's cost of capital is 12% a. Calculate each project's NPV. Do not round intermediate calculations. Round your answers to the nearest dollar. Project A: $ 5.29 Project B: $ Calculate each project's IRR. Round your answers to two decimal places. Project A: 13.76 % Project B: 23.50 % 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 $ -47,000,000 1-20 $ 140,000,00 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. 5.29 What is the IRR for this Project A? Round your answer to two decimal places. 13.76 % c. Select the correct graph for the NPV profiles for Plan A, Plan B, and Project A. A B D 150- 150 150- 150- 125- 125 125- 125- 100 100 100- 100B A 75+ 75 75 75 50 50 50 50 25 B 25 25 25 A 5 10 -25 Cost of capital(%) -501 5 -25 Cost of capital %) 5 10 20 25 -5 10 25 -5 5 10 -25 Cost of capital(%) -501 -25 Cost of capital(%) -501 so1 -50f The correct graph is graph C v NPV(Millions of Dollars) NPV(Millions of Dollars) NPV(Millions of Dollars) NPV(Millions of Dollars)
The Pinkerton Publishing Company is considering two mutually exclusive expansion plans. Plan A calls for the expenditure of $47 million on a large-scale, integrated plant that will provide an expected cash flow stream of $7 million per year for 20 years. Plan B calls for the expenditure of $13 million to build a somewhat less efficient, more labor-intensive plant that has an expected cash flow stream of $3.1 million per year for 20 years. The firm's cost of capital is 12% a. Calculate each project's NPV. Do not round intermediate calculations. Round your answers to the nearest dollar. Project A: $ 5.29 Project B: $ Calculate each project's IRR. Round your answers to two decimal places. Project A: 13.76 % Project B: 23.50 % 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 $ -47,000,000 1-20 $ 140,000,00 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. 5.29 What is the IRR for this Project A? Round your answer to two decimal places. 13.76 % c. Select the correct graph for the NPV profiles for Plan A, Plan B, and Project A. A B D 150- 150 150- 150- 125- 125 125- 125- 100 100 100- 100B A 75+ 75 75 75 50 50 50 50 25 B 25 25 25 A 5 10 -25 Cost of capital(%) -501 5 -25 Cost of capital %) 5 10 20 25 -5 10 25 -5 5 10 -25 Cost of capital(%) -501 -25 Cost of capital(%) -501 so1 -50f The correct graph is graph C v NPV(Millions of Dollars) NPV(Millions of Dollars) NPV(Millions of Dollars) NPV(Millions of Dollars)
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:**Investment Analysis: Evaluating Expansion Plans**
The Pinkerton Publishing Company is assessing two mutually exclusive expansion plans, Plan A and Plan B.
- **Plan A:** Involves an expenditure of $47 million for a large-scale, integrated plant producing an expected cash flow of $7 million annually over 20 years.
- **Plan B:** Requires the expenditure of $13 million for a smaller, more labor-intensive plant with an expected cash flow of $3.1 million annually over 20 years.
The cost of capital for the company is 12%.
**Part A: NPV and IRR Calculations**
1. **Net Present Value (NPV):**
- **Project A:** $5.29 million
- **Project B:** $5.29 million
2. **Internal Rate of Return (IRR):**
- **Project A:** 13.76%
- **Project B:** 23.50%
**Part B: Cash Flows for Project Δ**
- The cash flows are modeled if the firm opts for the larger plant instead of the smaller one:
- **Year 0:** -$47,000,000
- **Years 1-20:** $140,000,000 annually
- **NPV for Project Δ:** $5.29 million
- **IRR for Project Δ:** 13.76%
**Part C: NPV Profiles (Graph Selection)**
Four potential NPV profiles are provided. The graphs display the relationship between NPV (in millions of dollars) and the cost of capital (percentage).
- **Graph A:** Shows three curves labeled A, B, and Δ.
- **Graph B:** Displays another configuration of projects A, B, and Δ.
- **Graph C:** Offers a third layout for comparison.
- **Graph D:** Provides the final set for consideration.
The correct graph illustrating the NPV profiles for these projects is not indicated here, and needs to be chosen based on further analysis of cost of capital impacts and project comparisons.
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