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NPV PROFILES: SCALE DIFFERENCES 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 $6.4 million per year for 20 years. Plan B requires a $12 million expenditure to build a somewhat less efficient, more labor-intensive plant with expected cash flows of $2.72 million per year for 20 years. The firm’s WACC is 10%. a. Calculate each project’s NPV and IRR. b. Graph the NPV profiles for Plan A and Plan B and approximate the crossover rate. c. Calculate the crossover rate where the two projects’ NPVs are equal. d. Why is NPV better than IRR for making capital budgeting decisions that add to shareholder value?

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Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
Publisher: Cengage Learning
ISBN: 9781285867977
BuyFind

Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
Publisher: Cengage Learning
ISBN: 9781285867977

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Chapter 11, Problem 16P
Textbook Problem

NPV PROFILES: SCALE DIFFERENCES 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 $6.4 million per year for 20 years. Plan B requires a $12 million expenditure to build a somewhat less efficient, more labor-intensive plant with expected cash flows of $2.72 million per year for 20 years. The firm’s WACC is 10%.

  1. a. Calculate each project’s NPV and IRR.
  2. b. Graph the NPV profiles for Plan A and Plan B and approximate the crossover rate.
  3. c. Calculate the crossover rate where the two projects’ NPVs are equal.
  4. d. Why is NPV better than IRR for making capital budgeting decisions that add to shareholder value?

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