Question

A company is considering two mutually exclusive expansion plans. Plan A requires a $40 million expenditure on a large-scale integrated plant that would provide expected cash flows of $6.39 million per year for 20 years. Plan B requires a $15 million expenditure to build a somewhat less efficient, more labor-intensive plant with an expected cash flow of $3.36 million per year for 20 years. The firm's WACC is 10%. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the questions below.

Calculate each project's NPV. Round your answers to two decimal places. Do not round your intermediate calculations. Enter your answers in millions. For example, an answer of $10,550,000 should be entered as 10.55.
Plan A: $
million

Plan B: $
million

Calculate each project's IRR. Round your answer to two decimal places.

Plan A:
%

Plan B:
%

By graphing the NPV profiles for Plan A and Plan B, approximate the crossover rate to the nearest percent.

%

Calculate the crossover rate where the two projects' NPVs are equal. Round your answer to two decimal places.

%

Why is NPV better than IRR for making capital budgeting decisions that add to shareholder value?

Answer 1

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

C w ENG 07:04 31-07-2020 99+ 28 Х LP629 . LM LN LO LP LQ LR LS LT LU LV4 LL PLAN A PLAN B 0 -40 a RATE 10% LK 606 YEAR 607 608 609 610 611 1 6.39 NPV -15 3.36 3.36 3.36 2 6.39 PLAN A $ 14.40 (=NPV(LR607,LL608:LL627) +LL607] $ 13.61 (=NPV(LR607,LM608:LM627) +LM607] 3 6.39 PLAN B 4 6.39 3.36 612 5 6.39 3.36 IRR 6 6.39 3.36 3.36 7 6.39 PLAN A 613 614 615 616 617 15.00% (=IRR(LL607:LL627)] 21.98% (IRR(LM607:LM627)] 8 6.39 3.36 PLAN B 9 6.39 3.36 10 6.39 3.36 6.39 3.36 11 12. 6.39 3.36 618 619 620 621 622 13 6.39 3.36 14 6.39 3.36 15 6.39 3.36 16 6.39 3.36 623 624 17 6.39 3.36 18 6.39 3.36 625 626 19 6.39 3.36 20 6.39 3.36 627 628 629 EAC MACRS RELEVANT Ml-np-ir BETA LEVERED NPV | CCA REPLACEMENT BOND OPTION TO WAIT STEIN indiffEPS EBIT OCF 1 LEA ... +

C w ENG 07:06 31-07-2020 99+ 28 Х LU666 . LN LO LP LQ LR LS LT LU LV LW LX 664 b [=NPV(L0671,$LL$608:$LL$627) +$LL$607] NPV PROFILE $ 100.00 RATE NPV(A) 0% 2% 5% $ 80.00 665 666 667 668 669 670 671 672 673 674 675 676 677 678 679 680 681 682 683 8% $ 60.00 10% 15% 18% 20% 22% NPV (B) $ 87.80 $ 52.20 $ 64.49 $ 39.94 $ 39.63 $26.87 $ 22.74 $17.99 $ 14.40 $ 13.61 $ -0.00 $6.03 $ -5.80 $ 2.99 $ -8.88 $ 1.36 $ -11.50 $ -0.01 $ -14.73 $ -1.71 NPV $ 40.00 NPV(A) NPV (B) $ 20.00 25% APPROXIMATE CROSSOVER RATE = 10% $ 0.00 0% 5% 10% 15% 20% 25% 30% 684 685 686 $ -20.00 RATE 687 co EAC MACRS RELEVANT Ml-np-ir BETA LEVERED NPV CCA REPLACEMENT BOND OPTION TO WAIT STEIN indiffEPS EBIT OCF 1 LEA ... +

C w ? ENG 07:05 31-07-2020 99+ 28 Х LQ656 . LK LL LM LP LQ LR LS LT LU LV4 638 LN LO INCREMENTAL CFAT A-B PLAN A PLAN B с 0 -40 -25 -15 3.36 1 6.39 3.03 CROSSOVER RATE 639 YEAR 640 641 642 643 644 10.46% (=IRR(LN640:LN660)] 2 6.39 3.36 3.03 3 6.39 3.36 3.03 6.39 3.36 3.03 4 5 6.39 3.03 d 3.36 3.36 6 6.39 3.03 7 6.39 3.36 3.03 YES 8 6.39 3.36 3.03 9 6.39 3.36 3.03 645 646 647 648 649 650 651 652 653 654 NPV IS BETTER THAN IRR NPV IS BETTER THAN IRR AS IT SHOWS HOW MUCH WEALTH IS ADDED FOR SHAREHOLDERS SECONDLY, WHEN THERE ARE MORE THAN ONE OUTLFLOWS, IRR FAILS TO GIVE CORRECT ANSWER NPV ASSUMES WACC AS REINVESTMENT RATE, WHICH IS MORE RELIABLE THAN IRR RATE ASSUMPTION 10 6.39 3.36 3.03 3.03 11 6.39 3.36 12 6.39 3.36 3.03 13 6.39 3.36 3.03 14 6.39 3.36 3.03 15 6.39 3.36 3.03 16 6.39 3.36 3.03 17 6.39 3.36 3.03 655 656 657 658 659 660 18 6.39 3.36 3.03 19 6.39 3.36 3.03 3.03 20 6.39 3.36 661 EAC MACRS RELEVANT Ml-np-ir BETA LEVERED NPV CCA REPLACEMENT BOND OPTION TO WAIT STEIN indiffEPS EBIT OCF 1 LEA ... +