Problem 11-16 NPV profiles: scale differences A company is considering two mutua
ID: 2736399 • Letter: P
Question
Problem 11-16
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 $15 million expenditure to build a somewhat less efficient, more labor-intensive plant with an expected cash flow of $3.36 million per year for 20 years. The firm's WACC is 9%.
Calculate each project's NPV. Round your answers to two decimal places. 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 %
Graph the NPV profiles for Plan A and Plan B and approximate the crossover rate to the nearest percent.
%
Calculate the crossover rate where the two projects' NPVs are equal. Round your answer to the nearest hundredth.
%
Why is NPV better than IRR for making capital budgeting decisions that add to shareholder value?
Explanation / Answer
Answer:
Answer:
Answer:
Answer: NPV is better than IRR for making capital budgeting decisions that add to shareholder value because e NPV will describe how much value will add, which is what the firm will maximize.
Year Plan A Plan B 0 -40 -15 1 6.39 3.36 2 6.39 3.36 3 6.39 3.36 4 6.39 3.36 5 6.39 3.36 6 6.39 3.36 7 6.39 3.36 8 6.39 3.36 9 6.39 3.36 10 6.39 3.36 11 6.39 3.36 12 6.39 3.36 13 6.39 3.36 14 6.39 3.36 15 6.39 3.36 16 6.39 3.36 17 6.39 3.36 18 6.39 3.36 19 6.39 3.36 20 6.39 3.36 NPV $18.33 $15.67