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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%.
NPV
Rate Plan A Plan B We calculate the NPVs at different discounting rates and make the graph
0% $110.00 $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)
NPV Profile
$120.00
$100.00
$80.00
$60.00
$40.00 Plan A
NPV
Plan B
$20.00
$0.00
($20.00)
($40.00)
0% 4% 8% 12% 16% 20% 24% 28% 32%
Rate
Plan B
$20.00
$0.00
($20.00)
($40.00)
0% 4% 8% 12% 16% 20% 24% 28% 32%
Rate
g rates and make the graph
Plan A
Plan B
Plan B