Question

Integrative-Conflicting Rankings The High-Flying Growth Company (HFGC) has been expanding very rapidly in recent years, making its shareholders rich in the process. The average annual rate of return on the stock in the past few years has been 21%, and HFGC managers believe that 21% is a reasonable figure for the firm's cost of capital. To sustain a high growth rate, HFGC's CEO argues that the company must continue to invest in projects that offer the highest rate of return possible. Two projects are currently under review. The first is an expansion of the firm's production capacity, and the second project involves introducing one of the firm's existing products into a new market. Cash flows from each project appear in the following table: a. Calculate the NPV for both projects. Rank the projects based on their NPVs. b. Calculate the IRR for both projects. Rank the projects based on their IRRs. c. Calculate the Pl for both projects. Rank the projects based on their Pls. d. The firm can only afford to undertake one of these investments. What do you think the firm should do? i Data Table a. The NPV of the plant expansion project is $ . (Round to the nearest dollar.) (Click on the icon located on the top-right corner of the data table below in order to copy its contents into a spreadsheet.) Year Plant expansion - $3,400,000 $2,750,000 $1,750,000 $2,250,000 $1,500,000 Product introduction - $500,000 $275,000 $250,000 $300,000 $350,000 Print Done

Answer 1

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projects (Autosaved) (Autosaved) (Autosaved) - Microsoft Excel (Product Activation Failed) Review File Home Insert Page Layout Formulas Data View Add-Ins Cut E AutoSum - AC Wrap Text Calibri 11 General Copy Fill Merge & Center Insert Delete Format Sort & Find & Filter Select Paste +.0 .00 Conditional Format Cell BIU % .00 0 Format Painter Clear Formatting as Table Styles Number Clipboard Font Alignment Styles Cells Editing fox QD161 QE PZ QD PX PY QA ОВ QC QF PLANT PV FACTOR AT 145 PRODUCT 146 EXPANSION 21% INTRODUCTION PV OF CFAT PV OF CFAT year A*C B*C 147 A C 148 -3400000 0 -3400000 -500000 1 -500000 0.8264 149 1 2750000 275000 2272727.27 227272.73 1195273.55 150 2 1750000 250000 0.6830 170753.36 151 1270066.34 3 2250000 300000 0.5645 169342.18 0.4665 699761.07 152 4 1500000 350000 163277.58 153 154 NPV 2037828 230646 a 155 156 RANK 1 PLANT EXPANSION 157 2 PLANT INTRODUCTION 158 159 43.11% IRR (QB148:QB152)] b 160 IRR 54.16% IRR(QA148: QA152)] 161 162 163 RANK 1 PLANT EXPANSION 164 2 PLANT INTRODUCTION 165 NPV RELEVANT BETA LEVERED GI BOND STEIN indiffEPS EBIT LEASE 1 MI-np-ir REPLACEMENTS HPR GMAM EAC MACRS REPLACEMENT OPTION TO WAIT STRAIGHT LINE II Rea erences: E147 120% + EEE WA 04:35 ENG 20-11-2019

projects (Autosaved) (Autosaved) (Autosaved) - Microsoft Excel (Product Activation Failed) Review File Home Insert Page Layout Formulas Data View Add-Ins Cut E AutoSum - AC Wrap Text Calibri 11 General Copy Fill Merge & Center Paste +.0 .00 Conditional Format Cell Insert Delete Format Sort & Find & Filter Select BIU % .00 0 Format Painter Clear Formatting as Table Styles Clipboard Font Alignment Number Styles Cells Editing fox QC178 QE PZ PX PY QA Ов QC QD QF 159 43.11% IRR (QB148:QB152)] b 54.16% 160 IRR IRR(QA148:QA152)] 161 162 163 RANK 1 PLANT EXPANSION 164 2 PLANT INTRODUCTION 165 166 1.4613 [1 +(230645.85/500000)] 167 PI 1.5994 C (1 NPV/INVESTMENT) [1 +(2037828.23/3400000)] 168 169 170 RANK 1 PLANT EXPANSION 171 2 PLANT INTRODUCTION 172 173 174 d 175 AS PROJECTS ARE MUTUALLY EXLCUSIVE, WE WILL GO WITH HIGHEST NPV. SO SELECT PLANT EXPANSION 176 NPV SHOWS HOW MUCH WEALTH IS ADDED FOR THE SHAREHOLDERS. AND IT IS HIGHER FOR PLANT EXPANSION 177 178 GD EAC MACRS BOND NPV RELEVANT STEIN indiffEPS EBIT LEASE MI-np-ir REPLACEMENTS HPR GMAM BETA LEVERED REPLACEMENT OPTION TO WAIT STRAIGHT LINE II erences: E147 Rea 120% + EEE e WA 04:35 ENG 20-11-2019