Scale Differences The Pinkerton Publishing Company is considering two mutually e
ID: 2766176 • Letter: S
Question
Scale Differences
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%.
Calculate each project's NPV. Round your answers to the nearest dollar.
Calculate each project's IRR. Round your answers to two decimal places.
Set up a Project by showing the cash flows that will exist if the firm goes with the large plant rather than the smaller plant.
What is the NPV for this Project ? Round your answer to the nearest dollar.
$
What is the IRR for this Project ? Round your answer to two decimal places.
%
Explanation / Answer
NPV
Project A
$ 18.11
Project B
$ 13.95
IRR
Project A
15.03%
Project B
22.3%
A B Investment in the beginning $50 mn $15 mn Annual cash flow $8 mn $3.4 mn Period 20 years 20 years Cost of capital 10% 10% Present value of cash flows $ 68.11 $ 28.95 Net present value (Present value of cash flows- Investment in the beginning) $ 18.11 $ 13.95 IRR 15.03% 22.30%