Scale Differences The Pinkerton Publishing Company is considering two mutually e
ID: 2766321 • 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
Solution :
A
B
Year
DF@10%
CASH FLOW
PV
CASH FLOW
PV
a
b
c
d=b*c
e
f=b*e
0
1
- 50,000,000
- 50,000,000
- 15,000,000
- 15,000,000
1
0.909090909
8,000,000
7,272,727
3,400,000
3,090,909
2
0.826446281
8,000,000
6,611,570
3,400,000
2,809,917
3
0.751314801
8,000,000
6,010,518
3,400,000
2,554,470
4
0.683013455
8,000,000
5,464,108
3,400,000
2,322,246
5
0.620921323
8,000,000
4,967,371
3,400,000
2,111,132
6
0.56447393
8,000,000
4,515,791
3,400,000
1,919,211
7
0.513158118
8,000,000
4,105,265
3,400,000
1,744,738
8
0.46650738
8,000,000
3,732,059
3,400,000
1,586,125
9
0.424097618
8,000,000
3,392,781
3,400,000
1,441,932
10
0.385543289
8,000,000
3,084,346
3,400,000
1,310,847
11
0.350493899
8,000,000
2,803,951
3,400,000
1,191,679
12
0.318630818
8,000,000
2,549,047
3,400,000
1,083,345
13
0.28966438
8,000,000
2,317,315
3,400,000
984,859
14
0.263331254
8,000,000
2,106,650
3,400,000
895,326
15
0.239392049
8,000,000
1,915,136
3,400,000
813,933
16
0.217629136
8,000,000
1,741,033
3,400,000
739,939
17
0.197844669
8,000,000
1,582,757
3,400,000
672,672
18
0.17985879
8,000,000
1,438,870
3,400,000
611,520
19
0.163507991
8,000,000
1,308,064
3,400,000
555,927
20
0.148643628
8,000,000
1,189,149
3,400,000
505,388
NPV
18,108,510
13,946,117
IRR
15.03%
22.26%
Year
Project Cash Flows
0
- 35,000,000
(-50m-15m)
1-20.
4,600,000
(8m-3.4m)
NPV and IRR for this Project
Project
Year
DF@10%
CASH FLOW
PV
0
1
- 35,000,000
- 35,000,000
1
0.909090909
4,600,000
4,181,818
2
0.826446281
4,600,000
3,801,653
3
0.751314801
4,600,000
3,456,048
4
0.683013455
4,600,000
3,141,862
5
0.620921323
4,600,000
2,856,238
6
0.56447393
4,600,000
2,596,580
7
0.513158118
4,600,000
2,360,527
8
0.46650738
4,600,000
2,145,934
9
0.424097618
4,600,000
1,950,849
10
0.385543289
4,600,000
1,773,499
11
0.350493899
4,600,000
1,612,272
12
0.318630818
4,600,000
1,465,702
13
0.28966438
4,600,000
1,332,456
14
0.263331254
4,600,000
1,211,324
15
0.239392049
4,600,000
1,101,203
16
0.217629136
4,600,000
1,001,094
17
0.197844669
4,600,000
910,085
18
0.17985879
4,600,000
827,350
19
0.163507991
4,600,000
752,137
20
0.148643628
4,600,000
683,761
NPV
4,162,393
IRR
11.71%
A
B
Year
DF@10%
CASH FLOW
PV
CASH FLOW
PV
a
b
c
d=b*c
e
f=b*e
0
1
- 50,000,000
- 50,000,000
- 15,000,000
- 15,000,000
1
0.909090909
8,000,000
7,272,727
3,400,000
3,090,909
2
0.826446281
8,000,000
6,611,570
3,400,000
2,809,917
3
0.751314801
8,000,000
6,010,518
3,400,000
2,554,470
4
0.683013455
8,000,000
5,464,108
3,400,000
2,322,246
5
0.620921323
8,000,000
4,967,371
3,400,000
2,111,132
6
0.56447393
8,000,000
4,515,791
3,400,000
1,919,211
7
0.513158118
8,000,000
4,105,265
3,400,000
1,744,738
8
0.46650738
8,000,000
3,732,059
3,400,000
1,586,125
9
0.424097618
8,000,000
3,392,781
3,400,000
1,441,932
10
0.385543289
8,000,000
3,084,346
3,400,000
1,310,847
11
0.350493899
8,000,000
2,803,951
3,400,000
1,191,679
12
0.318630818
8,000,000
2,549,047
3,400,000
1,083,345
13
0.28966438
8,000,000
2,317,315
3,400,000
984,859
14
0.263331254
8,000,000
2,106,650
3,400,000
895,326
15
0.239392049
8,000,000
1,915,136
3,400,000
813,933
16
0.217629136
8,000,000
1,741,033
3,400,000
739,939
17
0.197844669
8,000,000
1,582,757
3,400,000
672,672
18
0.17985879
8,000,000
1,438,870
3,400,000
611,520
19
0.163507991
8,000,000
1,308,064
3,400,000
555,927
20
0.148643628
8,000,000
1,189,149
3,400,000
505,388
NPV
18,108,510
13,946,117
IRR
15.03%
22.26%