Zoe would like to be able to save for night courses at the local college. Which of these would be a good way for Zoe to make mor
1 answer:
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Answer:
NPV of Plan A: $15,669,953.
NPV of Plan B: $18.260,647.
For the Plan A, the IRR is r=0.15.
For the Plan B, the IRR is r=0.32.
Explanation:
We have two expansion plans:
Plan A:
- Expenditure: -$56 million
- Cash flow: $9 million/year
- Duration: 20 years
Plan B:
- Expenditure: -$12 million
- Cash flow: $3.8 million/year
- Duration: 20 years
The NPV of plan A can be expressed as:
NPV of Plan A: $15,669,953.
The NPV of plan B can be expressed as:
NPV of Plan B: $18.260,647.
To calculate the IRR, we have to clear the discount rate for NPV=0. We can not solve this analitically, but we can do it by iteration (guessing) or by graphing different NPV, with the discount rate as the independent variable.
For the Plan A, the IRR is r=0.15.
For the Plan B, the IRR is r=0.32.
