Pinkerton The 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 call for the expenditure of $15 million to build a somewhat less efficient, more laborintensive 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.
The cash flows for the projects are
Plan A
Plan B
Initial Investment
-50
-15 million
Annual cash flow
8
3.4 million
Period
20
20 years
Discounting of Rate
10%
10%
PV cash flows
$68.11
$28.95 Using the PV function
NPV
$18.11
$13.95 NPV = PV of cash flows - initial investment
IRR
15.03%
22.3% Using RATE function
c.) Graph the NPV profiles for Plan A, Plan B
NPV
Plan A
Plan B
We calculate the NPVs at different discounting rates and make the graph
0%
$59.00
$53.00
4%
$58.72
$31.21
8%
$28.55
$18.38
12%
$9.76
$10.40
16%
($2.57)
$5.16
20% ($11.04)
$1.56
24% ($17.12)
($1.03)
28% ($21.63)
($2.94)
32% ($25.10)
($4.42)
Rate
NPV
NPV Profile
$ 70.00
$ 60.00
$ 50.00
$ 40.00
$ 30.00
$ 20.00
$ 10.00
$0.00
($10.00)0%
($20.00)
($30.00)
Plan A
Plan B
4%
8%
12% 16% 20% 24% 28% 32%
Rat e