Chapter 12, Problem 15P

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%.

1. a. Calculate each project’s NPV and IRR.
2. 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 ∆?
3. c. Graph the NPV profiles for Plan A, Plan B, and Project ∆.