ead the following case carefully and answer the questions: A company is considering two mutually exclusive expansion plans. Plan A requires a Rs. 40 million expenditure on a long-scale integrated plant that would provide expected cash flows of Rs. 6.4 million per year for 20 years. Plan B requires a Rs.12 million expenditure to build a somewhat less efficient, more laborintensive plant with expected cash flows of Rs. 2.72 million per year for 20 years. The company's WACC is 10%. You are required to solve the following questions: a. Calculate each project's NPV and IRR. [6] b. Graph the NPV profiles for plan A and Plan B and approximate the crossover rate. [3] c. Calculate the crossover rate where the two projects' NPVs are equal. [3] d. Why is NPV better than IRR for making capital budgeting decisions that add to shareholder value? Explain.
Read the following case carefully and answer the questions:
A company is considering two mutually exclusive expansion plans. Plan A requires a Rs. 40 million
expenditure on a long-scale integrated plant that would provide expected cash flows of Rs. 6.4 million per year
for 20 years. Plan B requires a Rs.12 million expenditure to build a somewhat less efficient, more laborintensive
plant with expected cash flows of Rs. 2.72 million per year for 20 years. The company's WACC is
10%. You are required to solve the following questions:
a. Calculate each project's NPV and
b. Graph the NPV profiles for plan A and Plan B and approximate the crossover rate. [3]
c. Calculate the crossover rate where the two projects' NPVs are equal. [3]
d. Why is NPV better than IRR for making capital budgeting decisions that add to shareholder value?
Explain.
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