The Pinkerton Publishing Company is considering two mutually

The Pinkerton Publishing Company is considering two mutually exclusive expansion plans. Plan A calls for the expenditure of $56 million on a large-scale, integrated plant that will provide an expected cash flow stream of $9 million per year for 20 years. Plan B calls for the expenditure of $12 million to build a somewhat less efficient, more labor-intensive plant that has an expected cash flow stream of $3.8 million per year for 20 years. The firm\'s cost of capital is 11%.

Calculate each project\'s NPV. Round your answers to the nearest dollar.

Calculate each project\'s IRR. Round your answers to two decimal places.

Set up a Project ? by showing the cash flows that will exist if the firm goes with the large plant rather than the smaller plant.

What is the NPV for this Project ?? Round your answer to the nearest dollar.

$

What is the IRR for this Project ?? Round your answer to two decimal places.
%

Project A	$
Project B	$

Solution

Calculation of NPV of projects First we will calculate the Annuity Present Value Factor using interest rate of 11% Annuity PV factor = [1-(1+r)^-n]/r r = rate per year = 11% n = no.of years = 20 Annuity PV factor = [1-(1+0.11)^-20]/0.11 Annuity PV factor = 7.963328 NPV of project = Present value of future cash inflows - Initial Investment NPV of Project A = [$9,000,000 *7.963328] - $56,000,000 NPV of project A = $15,669,953 NPV of Project B = [$3,800,000 *7.963328] - $12,000,000 NPV of project B = $18,260,647 Calculation of IRR of project Year Project A Project B 0 -$56,000,000.00 -$12,000,000.00 1 $9,000,000.00 $3,800,000.00 2 $9,000,000.00 $3,800,000.00 3 $9,000,000.00 $3,800,000.00 4 $9,000,000.00 $3,800,000.00 5 $9,000,000.00 $3,800,000.00 6 $9,000,000.00 $3,800,000.00 7 $9,000,000.00 $3,800,000.00 8 $9,000,000.00 $3,800,000.00 9 $9,000,000.00 $3,800,000.00 10 $9,000,000.00 $3,800,000.00 11 $9,000,000.00 $3,800,000.00 12 $9,000,000.00 $3,800,000.00 13 $9,000,000.00 $3,800,000.00 14 $9,000,000.00 $3,800,000.00 15 $9,000,000.00 $3,800,000.00 16 $9,000,000.00 $3,800,000.00 17 $9,000,000.00 $3,800,000.00 18 $9,000,000.00 $3,800,000.00 19 $9,000,000.00 $3,800,000.00 20 $9,000,000.00 $3,800,000.00 IRR of Project A = 15.11% IRR of Project B = 31.53% Year Project Cash Flows 0 -$56,000,000.00 1-20 $180,000,000.00 NPV of Project A $15,669,953 IRR of Project A 15.11%