a.
To calculate: The NPV and IRR of Project A and Project B.
Introduction:
Mutually Exclusive Projects:
It refers to the group of projects in which, if one project is accepted it will automatically imply the rejection of rest. It refers to those projects for which investment cannot be made together.
It is a method under capital budgeting which includes the calculation of net present value of the project in which the company is investing. The calculation is done by calculating the difference between the value of
It refers to the rate of return that is computed by the company to make a decision regarding the selection of a project for investment. This rate provides the basis for selection of projects with lower cost of capital and rejection of project with higher cost of capital.
b.
To prepare: The NPV profiles of the two plans and the crossover rate.
Introduction:
Crossover Rate:
It refers to that discounted rate at which the NPV of the two projects becomes equal. It is a cost of capital of the project.
c.
To calculate: Crossover rate of the two plans.
d.
To explain: The reason of NPV being better than IRR for capital budgeting decisions.
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Chapter 11 Solutions
Fundamentals of Financial Management (MindTap Course List)
- 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 firms cost of capital is 10%. a. Calculate each projects NPV and IRR. 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. What are the NPV and the IRR for this Project ? c. Graph the NPV profiles for Plan A, Plan B, and Project .arrow_forwardProject S has a cost of $10,000 and is expected to produce benefits (cash flows) of $3,000 per year for 5 years. Project L costs $25,000 and is expected to produce cash flows of $7,400 per year for 5 years. Calculate the two projects’ NPVs, IRRs, MIRRs, and PIs, assuming a cost of capital of 12%. Which project would be selected, assuming they are mutually exclusive, using each ranking method? Which should actually be selected?arrow_forwardM1.. Industrialization Enterprise is considering a three-year project that will require an initial investment of $44,000. If market demand is strong, Industrialization Enterprise thinks that the project will generate cash flows of $28,500 per year. However, if market demand is weak, the company believes that the project will generate cash flows of only $1,500 per year. The company thinks that there is a 50% chance that demand will be strong and a 50% chance that demand will be weak. If the company uses a project cost of capital of 14%, what will be the expected net present value (NPV) of this project? (Note: Do not round intermediate calculations and round your answer to the nearest whole dollar.) -$9,176 -$8,258 -$7,800 -$11,011 Industrialization Enterprise has the option to delay starting this project for one year so that analysts can gather more information about whether demand will be strong or weak. If the company chooses to delay the project, it will have to give up a year of…arrow_forward
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