NPV profiles: scale differences
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 9%.
a) 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 $ million
Plan B $ million
Calculate each project's IRR. Round your answer to two decimal places.
Plan A %
Plan B %
b) By graphing the NPV profiles for Plan A and Plan B, approximate the crossover rate to the nearest percent.
%
c) 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?