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Question: 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 which will provide an expected cash flow stream of $8 million per year for 20 years. Plan B calls for the expenditure of $15 million to build a somewhat less efficient, more labor-intensive plant which has an expected cash flow stream of $3.4 million per year for 20 years. The firm's cost of capital is 10 percent.

a. Calculate each project's NPV and IRR.

b. 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 are the NPV and the IRR for this Project ?

c. Graph the NPV profiles for Plan A, Plan B, and Project .

d. Give a logical explanation, based on reinvestment rates and opportunity costs, as to why the NPV method is better than the IRR method when the firm's cost of capital is constant at some value such as 10 percent.

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Accounting Basics, Accounting

Category:- Accounting Basics
Reference No.:- M92333761

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