Question

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%.

a) Calculate each project's NPV and IRR.

b) 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 are the NPV and the IRR for this Project ▵?

c) Graph the NPV profiles for Plan A, Plan B, and Project ▵.

Show your steps of solving the problems.

Answer 1

a)

NPV OF PROJECT A is $16.46 Million, IRR of Project A is 15.03%

NPV of PROJECT B is $12.68 Million, IRR of Project B is 22.26%

b) If we go with the large plant which is Project A the Inflow would be $160Million and outflow is $50million with a net inflow of $110million. The NPV for the same is $16.46million.

The IRR of Project A is 22.26%

c) Graph attached