Question

1.	Use Excel to compute the NPV and IRR of the two plans. Which​ plan, if​ any, should the company​ pursue?
2.	Explain the relationship between NPV and IRR. Based on this relationship and the​ company's required rate of​ return, are your answers as expected in Requirement​ 1? Why or why​ not?
3.	After further​ negotiating, the company can now invest with an initial cost of $ 5 comma 600 comma 000$5,600,000 for both plans. Recalculate the NPV and IRR. Which​ plan, if​ any, should the company​ pursue?

Wooten

Company is considering two capital investments. Both investments have an initial cost of

$ 6 comma 000 comma 000$6,000,000

and total net cash inflows of

$ 14 comma 000 comma 000$14,000,000

over 10 years.

WootenWooten

requires a

2020​%

rate of return on this type of investment. Expected net cash inflows are as​ follows:

Year	Plan Alpha	Plan Beta
1	$1,400,000	$1,400,000
2	1,400,000	1,800,000
3	1,400,000	2,200,000
4	1,400,000	1,800,000
5	1,400,000	1,400,000
6	1,400,000	700,000
7	1,400,000	600,000
8	1,400,000	500,000
9	1,400,000	400,000
10	1,400,000	3,200,000
Total	$14,000,000	$14,000,000

Answer 1

1:

NPV	($130,539.08)	$233,001.11
IRR	19.36%	21.25%

2: NPV represents the dollar value added by a proposal while IRR is the rate of return on the cash flows as a percentage.Since these are conventional cash flows the results from NPV analysis and IRR analysis provide the same result. In both cases Plan BETA is selected primarily because it as a higher NPV and a higher IRR.

3:

NPV	$269,460.92	$633,001.11
IRR	21.41%	23.61%

Now the Company should take up both the proposals since both have positive NPV. If only 1 is to be selected, Select Plan Beta.

WORKINGS