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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 $6.39 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%.
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 NPV profiles for Plan A and Plan B, approximate the crossover rate to the nearest percent.
%
c) 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?
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