CA finance week 6

# CA finance week 6 - 10 10 PV of cash flows \$68.11 \$28.95...

This preview shows page 1. Sign up to view the full content.

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 call 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. 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 Rate
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: 10% 10% PV of 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 Rate 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) 0% 4% 8% 12% 16% 20% 24% 28% 32% (\$30.00) (\$20.00) (\$10.00) \$0.00 \$10.00 \$20.00 \$30.00 \$40.00 \$50.00 \$60.00 \$70.00 NPV Profile Plan A Plan B Rate NPV...
View Full Document

## This note was uploaded on 11/16/2011 for the course FIN 230 taught by Professor Tennant during the Spring '11 term at Texas Woman's University.

Ask a homework question - tutors are online