Why is npv better than irr for making capital budgeting

Assignment Help Financial Management

Reference no: EM132041849

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 $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 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

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

Plan A: %

Plan B: %

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

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

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

Reference no: EM132041849

Questions Cloud

Calculate present value of tax savings from depreciation : Calculate the initial cost of investment. Calculate present value of after-tax cash operating income. Calculate present value of tax savings from depreciation.

Interest rate cap from large investment banking firm : Zion National Bank (ZNB) purchased a two-year $250 million (notional value) interest rate cap from a large investment banking firm.

Appreciate against peso to cause such strategy to backfire : By how much would the dollar have to appreciate against the peso to cause such a strategy to backfire.

Greater parity to relative charge structures of hospitals : The purpose of which of the following measures is to provide greater parity to relative charge structures of U.S. hospitals?

Why is npv better than irr for making capital budgeting : Calculate each project's NPV. Why is NPV better than IRR for making capital budgeting decisions that add to shareholder value?

Determine the expected effective financing rate : Assume that Jacksonville does not cover its exposure and uses the forward rate to forecast the future spot rate. Determine the expected effective financing rate

What is the payment made under the cap : If 3-month LIBOR is 5.75% on the last day of year one, what is the payment made under the cap? Who makes the payment to whom?

Compute the net proceeds to the presley corporation : Compute the earnings per share immediately before the stock issue. Compute the net proceeds to the Presley Corporation.

What dividend yield and capital gain rate : What would be the expected stock price at the end of the year? What dividend yield and capital gain rate would you expect at the price estimated in (A)?

User Account

All Pages