Question

A company is considering two mutually exclusive expansion plans. Plan A requires a $41 million expenditure on a large-scale integrated plant that would provide expected cash flows of $6.55 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%.

1. 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:     $   million

   Calculate each project's IRR. Round your answers to one decimal place.

   Plan A:       %

   Plan B:       %

2. By graphing the NPV profiles for Plan A and Plan B, determine the crossover rate. Round your answer to the nearest whole number.
     %
   
3. Calculate the crossover rate where the two projects' NPVs are equal. Round your answer to one decimal place.
     %
   
4. Is NPV better than IRR for making capital budgeting decisions that add to shareholder value?
   -Select- ( yes or no)

Answer 1

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projects (Autosaved) (Autosaved) (Autosaved) - Microsoft Excel (Product Activation Failed) Review File Home Insert Page Layout Formulas Data View Add-Ins E AutoSum- Cut AC Wrap Text General Calibri 11 Copy Fill В IUT Merge & Center Sort & Find & Filter Select Paste +.0 .00 Conditional Format Cell Insert Delete Format % .00 0 Format Painter Clear Formatting as Table Styles Editing Clipboard Font Alignment Number Styles Cells f&x LR619 LU LK LM LN LO LP LQ LR LS LT LU LV PLAN B 606 YEAR PLAN A 607 -41 -11 RATE 9% a 608 6.55 1 2.47 NPV $18.79 NPV(LR607,LL608: LL627) +LL607] $11.55 ENPV(LR607,LM608:LM627) +LM607] 609 2 6.55 2.47 PLAN A 610 3 6.55 2.47 PLAN B 611 4 6.55 2.47 612 2.47 6.55 IRR 613 6 6.55 2.47 15.0% EIRR(LL607:LL627)] 614 7 6.55 2.47 PLAN A 22.0% IRR(LM607:LM627)] 615 6.55 2.47 PLAN B 616 6.55 2.47 617 10 6.55 2.47 618 11 6.55 2.47 619 12 6.55 2.47 620 13 6.55 2.47 621 14 6.55 2.47 2.47 622 15 6.55 623 16 6.55 2.47 624 17 6.55 2.47 625 18 6.55 2.47 626 19 6.55 2.47 627 20 6.55 2.47 628 IRRnpvbeta NPV RELEVANT STEIN i MI-пр-ir RATION PBP ARR invest, EAA REPLACEMENTS HPR GMAM EAC MACRS BETA LEVERED REPLACEMENT BOND OPTION TO WAIT III E 110% Rea II erences: E147 WA 11:27 ENG 21-11-2019

projects (Autosaved) (Autosaved) (Autosaved) - Microsoft Excel (Product Activation Failed) Review File Home Insert Page Layout Formulas Data View Add-Ins Cut E AutoSum - AC Wrap Text Calibri 11 General Copy Fill Merge & Center Conditional Format Formatting as Table Styles Paste в IU* +.0 .00 Cell Insert Delete Format Sort & Find & Filter Select % .00 0 Format Painter Clear Editing Clipboard Font Alignment Number Styles Cells fox LO682 LN LO LP LQ LR LS LT LU LV LW LX LY 667 [=NPV(LO671,$LL$608:$LL$627) +$LL$607] 668 $100.00 669 NPV PROFILE NPV (B) NPV(A) $90.00 670 RATE $ 38.40 671 0% $ 80.00 $66.10 $29.39 672 2% $ 40.63 $ 19.78 673 5% $28.39 $15.17 674 7% $ 60.00 $14.76 $10.03 $ 7.45 $ 4.46 675 10% $ 7.92 $-0.00 676 12% 15% 677 NPV(A) $ 40.00 $-5.94 $2.22 678 18% NPV (B) $-11.79 $0.02 679 22% 680 $20.00 681 APPROXIMATE CROSSOVER RATE = 12% 682 683 $ 0.00 684 5% 20% 25% 0% 10% 15% 685 686 $-20.00 687 RATE 688 689 IRRnpvbeta STEIN iD invest, EAA MI-пр-ir NPV RATION PBP ARR REPLACEMENT S HPR GMAM EAC MACRS RELEVANT BETA LEVERED REPLACEMENT BOND OPTION TO WAIT E 110% Rea II erences: E147 WA 11:29 ENG 21-11-2019 AdN

projects (Autosaved) (Autosaved) (Autosaved) - Microsoft Excel (Product Activation Failed) Review File Home Insert Page Layout Formulas Data View Add-Ins E AutoSum - Cut AC Wrap Text General Calibri 11 Copy Fill Merge & Center Insert Delete Format Paste B I U +.0 .00 Conditional Format Cell Sort & Find & % .00 0 Format Painter Clear Filter Select Formatting as Table Styles Clipboard Number Editing Font Alignment Styles Cells fox LV638 LK LL LM LN LO LP LQ LR LS LT LU LV LW 638 INCREMENTAL CFAT PLAN A PLAN B 639 YEAR A-B C 640 -41 -11 -30 641 6.55 2.47 4.08 CROSSOVER RATE 12.25% [=IRR(LN640:LN660)] 642 2 6.55 2.47 4.08 643 3 6.55 2.47 4.08 644 6.55 2.47 4 4.08 YES 645 5 6.55 2.47 4.08 646 6 6.55 2.47 4.08 NPV IS BETTER THAN IRR 647 7 6.55 2.47 4.08 NPV IS BETTER THAN IRR AS IT SHOWS HOW MUCH WEALTH IS ADDED FOR SHAREHOLDERS 648 6.55 8 2.47 4.08 SECONDLY, WHEN THERE ARE MORE THAN ONE OUTLFLOWS, IRR FAILS TO GIVE CORRECT ANSWER 4.08 649 6.55 2.47 NPV ASSUMES WACC AS REINVESTMENT RATE, WHICH IS MORE RELIABLE THAN IRR RATE ASSUMPTION 4.08 650 10 6.55 2.47 4.08 651 11 6.55 2.47 4.08 652 12 6.55 2.47 653 13 6.55 2.47 4.08 654 2.47 14 6.55 4.08 655 15 6.55 2.47 4.08 4.08 656 16 6.55 2.47 657 17 6.55 2.47 4.08 658 4.08 6.55 18 2.47 659 19 6.55 2.47 4.08 660 20 6.55 2.47 4.08 IRRnpvbeta STEIN iD invest, EAA NPV BOND RATION PBP ARR MI-np-ir REPLACEMENTS HPR GMAM EAC MACRS RELEVANT BETA LEVERED REPLACEMENT OPTION TO WAIT III E 110% II erences: E147 Rea e WA 11:28 ENG 21-11-2019