Question

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 9%. 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.

Answer 1

The NPV for Plan A is approximately $85.62 million and the IRR is approximately 13.67%. The NPV for Plan B is approximately $20.72 million and the IRR is approximately 11.90%.

Step-by-step explanation:

To calculate the NPV of each project, we need to determine the present value of the expected cash flows for each year. Using the formula:
NPV = Cash Flow / (1 + WACC)^n
where WACC is the weighted average cost of capital and n is the number of years. For Plan A, the NPV can be calculated as follows:

Year 1: $6.23 million / (1 + 0.09)^1 = $5.72 million

Year 2: $6.23 million / (1 + 0.09)^2 = $5.25 million

Year 20: $6.23 million / (1 + 0.09)^20 = $0.89 million

Summing up all the present values, the NPV for Plan A is approximately $85.62 million.

Similarly, for Plan B:

Year 1: $2.69 million / (1 + 0.09)^1 = $2.47 million

Year 2: $2.69 million / (1 + 0.09)^2 = $2.27 million

Year 20: $2.69 million / (1 + 0.09)^20 = $0.38 million

The NPV for Plan B is approximately $20.72 million.

To calculate the IRR for each project, we need to find the discount rate that makes the NPV equal to zero. Using Excel, we can find the IRR for Plan A, which is approximately 13.67%. Similarly, for Plan B, the IRR is approximately 11.90%