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
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- Project 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_forwardeBook 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 $12 million expenditure to build a somewhat less efficient, more labor-intensive plant with an expected cash flow of $2.69 million per year for 20 years. The firm's WACC is 9%. Calculate each project's IRR. Round your answers to one decimal place. Plan A: % Plan B: %arrow_forwardExcel Online Structured Activity: NPV profiles 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 $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 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. X Open spreadsheet a. 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: $ Plan B: $ Calculate each project's IRR. Round your answer to two decimal places. Plan A: Plan B: million millionarrow_forward
- eBook 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 $12 million expenditure to build a somewhat less efficient, more labor-intensive plant with an expected cash flow of $2.69 million per year for 20 years. The firm's WACC is 11%. 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: % By graphing the NPV profiles for Plan A and Plan B, determine the crossover rate. Round your answer to the nearest whole number. % Calculate the crossover rate where the two projects' NPVs are equal. Round your…arrow_forwardA 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 $12 million expenditure to build a somewhat less efficient, more labor-intensive plant with an expected cash flow of $2.69 million per year for 20 years. The firm's WACC is 9%. 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: $ millionarrow_forwardA company is considering two mutually exclusive expansion plans. Plan A requires a $39 million expenditure on a large-scale integrated plant that would provide expected cash flows of $6.23 million per year for 20 years. Plan B requires a $12 million expenditure to build a somewhat less efficient, more labor-intensive plant with an expected cash flow of $2.69 million per year for 20 years. The firm's WACC is 10%. 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: % By graphing the NPV profiles for Plan A and Plan B, determine the crossover rate. Round your answer to one decimal place. % Calculate the crossover rate where the two projects' NPVs are equal. Round your answer to one…arrow_forward
- A company is considering two mutually exclusiveexpansion plans. Plan A requires a $40 million expenditure on a large-scale integratedplant that would provide expected cash flows of $6.4 million per year for 20 years. Plan Brequires a $12 million expenditure to build a somewhat less efficient, more labor-intensiveplant with expected cash flows of $2.72 million per year for 20 years. The firm’s WACCis 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 shareholdervalue?arrow_forwardExcel Online structured Activity: NPV profiles 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 $13 million expenditure to build a somewhat less efficient, more labor-intensive plant with an expected cash flow of $2.91 million per year for 20 years. The firm's WACC is 11%. 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. Open spreadsheet a. 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: % b. By graphing the…arrow_forwardA company is considering two mutually exclusive expansion plans. Plan A requires a $39 million initial outlay on a large-scale integrated plant that would provide expected cash flows of $6.23 million per year for 20 years. Plan B requires a $11 million initial outlay to build a somewhat less efficient, more labor-intensive plant with expected cash flows of $2.47 million per year for 20 years. The firm's WACC is 10%. 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: % By graphing the NPV profiles for Plan A and Plan B, determine the crossover rate. Approximate your answer to the nearest whole number. % Calculate the crossover rate where the two projects' NPVs are equal. Round…arrow_forward
- A company is considering two mutually exclusive expansion plans. Plan A requires a $39 million expenditure on a large-scale integrated plant that would provide expected cash flows of $6.23 million per year for 20 years. Plan B requires a $12 million expenditure to build a somewhat less efficient, more labor-intensive plant with an expected cash flow of $2.69 million per year for 20 years. The firm's WACC is 11%. 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: % By graphing the NPV profiles for Plan A and Plan B, determine the crossover rate. Round your answer to one decimal place. % Calculate the crossover rate where the two projects' NPVs are equal. Round your answer to…arrow_forwardExcel Assessment A company is considering three mutually exclusive projects for its expansion plans. The initial investment in the project is OMR 400000. The finance director thinks that the project with the higher NPV should be chosen, whereas the managing director believes that the higher IRR should be undertaken, especially as projects have the same initial outlay and length of life. The company anticipates a cost of capital of 10.5%, and the net after-tax cash flows of the projects are as follows: Year Cash Flow A Cash Flow B Cash Flow C 1 70000 436000 90000 160000 20000 149000 180000 20000 51200 4 150000 8000 100000 5 40000 6000 49400 (All amounts are in OMR) Required: (b) Which project will you advise to undertake to the company? Explain your answer (c) What deficiencies in IRR can be overcome by using MIRR? 2.arrow_forwardA 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 $13 million expenditure to build a somewhat. less efficient, more labor-intensive plant with an expected cash flow of $2.91 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. Open spreadsheet a. 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: $ Plan B: $ million Calculate each project's IRR. Round your answer to two decimal places. Plan A: Plan B: % % million % b. By graphing the NPV profiles for Plan A and Plan B,…arrow_forward
- Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage Learning