Question

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 $12 million expenditure to build a somewhat less efficient, more labor-intensive plant with an expected cash flow of $2.69 million per year for 20 years. The firm's WACC is 11%. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the questions below. Open spreadsheet Calculate each project's NPV. Round your answers to two decimal places. Do not round your intermediate calculations. Enter your answers in millions. For example, an answer of $10,550,000 should be entered as 10.55. Plan A: $ 10.89 million Plan B: $ 9.42 million Calculate each project's IRR. Round your answer to two decimal places. Plan A: 15 % Plan B: 22 % By graphing the NPV profiles for Plan A and Plan B, approximate the crossover rate to the nearest percent. 11.79 % Calculate the crossover rate where the two projects' NPVs are equal. Round your answer to two decimal places. % Why is NPV better than IRR for making capital budgeting decisions that add to shareholder value? The input in the box below will not be graded, but may be reviewed and considered by your instructor.

Answer 1

	A	B	A-B
CF0	-40	-12	-28
PMT	6.39	2.69	3.7
N	20	20	20
NPV	$10.89	$9.42
IRR	15.00%	22.00%	11.79%

NPV can be calculated using PV function in excel

NPV = PV(rate = 11%, nper = 20, pmt = -6.39 or -2.69, fv = 0, 0) - CF0

IRR can be calculated using RATE function in excel

IRR = RATE(nper = 20, pmt = 6.39 or 2.69, pv = -40 or -12, fv = 0, 0)

Crossover rate is the IRR in the difference of both cash flows. = 11.79%

NPV is a better choice because it shows the value added to the firm if the firm chooses to select that particular project. As NPV is higher for Project A, it would add more value to the firm.