The Pinkerton Publishing Company is considering two mutually exclusive expansion

Question

The Pinkerton Publishing Company is considering two mutually exclusive expansion plans. Plan A calls for the expenditure of $50 million on a large-scale, integrated plant that will provide an expected cash flow stream of $8 million per year for 20 years. Plan B calls for the expenditure of $15 million to build a somewhat less efficient, more labor-intensive plant that has an expected cash flow stream of $3.4 million per year for 20 years. The firm's cost of capital is 10%.

A.Calculate each project's NPV. Round your answers to the nearest dollar.

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

Explanation / Answer

NPV of project A = -50+8/(1.10)^1+8/(1.10)^2+8/(1.10)^3+8/(1.10)^4+8/(1.10)^5+8/(1.10)^6+8/(1.10)^7+8/(1.10)^8+8/(1.10)^9+8/(1.10)^10+8/(1.10)^11+8/(1.10)^12+8/(1.10)^13+8/(1.10)^14+8/(1.10)^15+8/(1.10)^16+8/(1.10)^17+8/(1.10)^18+8/(1.10)^19+8/(1.10)^20

=$18.11

NPV of project B = -15+3.4/(1.1)^1+3.4/(1.1)^2+3.4/(1.1)^3+3.4/(1.1)^4+3.4/(1.1)^5+3.4/(1.1)^6+3.4/(1.1)^7+3.4/(1.1)^8+3.4/(1.1)^9+3.4/(1.1)^10+3.4/(1.1)^11+3.4/(1.1)^12+3.4/(1.1)^13+3.4/(1.1)^14+3.4/(1.1)^15+3.4/(1.1)^16+3.4/(1.1)^17+3.4/(1.1)^18+3.4/(1.1)^19+3.4/(1.1)^20

= $13.95

Use function IRR in excel as = IRR(-50,8,8,8,8,8,8,8,8,8,8,8,8,8,8,8,8,8,8,8,8) = 15.03% is the IRR for A.

Use function IRR in excel as = IRR(-15,3.4,3.4,3.4,3.4,3.4,3.4,3.4,3.4,3.4,3.4,3.4,3.4,3.4,3.4,3.4,3.4,3.4,3.4,3.4,3.4) = 22.26% is the IRR for B.

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