A company is considering two mutually exclusive expansion plans. Plan A requires

Question

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 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.

1. 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:

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

Plan A:

Plan B:

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

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

Explanation / Answer

NPV= {After-Tax Cash Flow / (1+r)^t} – Initial Investment

NPV Project A = 18.33

NPV Project B = 11.54

There are two ways to calculate IRR in Excel:

IRR Project A = 15%

IRR Project B = 22%

Initial cash outflows = 40 - 11 = 29

Cash flows at end of year 1 to 20 = 6.39 - 2.47 = 3.92

Cross over rate is the rate at which the NPV of both projects will be equal and is calculated by taking the PV of the difference of the initial and the yearly cash flows -

Cross over rate = 13.1%

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