The Delta Publishing Company is considering two mutually exclusive expansion plans. Plan Alpha 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 Beta 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. (I have already accomplished this step)
b. Set up a Project delta 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 IRR for this Project delta?
c. Give a logical brief explanation, based on reinvestment rates and opportunity costs, as to why the NPV method is better that the IRR method when the firm's cost of capital is constant at some value such as 10%.