Which unit would you recommend?
NPV of HCC:
=-590000-55000/7.5%*(1-1/1.075^5)=-812523.6696
NPV of LCC:
=-110000-180000/7.5%*(1-1/1.075^5)=-838259.2824
Since we are examining costs, the unit chosen would be the one that had the lower NPV of costs. Since HCC's NPV of costs is lower than LCC's, HCC would be chosen.
If Kim's controller wanted to know the IRRs of the two projects,
what would you tell him?
The IRR cannot be calculated because the cash flows are all one
sign. A change of sign would be needed in order to calculate the
IRR.
If the WACC rose to 15% would this affect your
recommendation?
NPV of HCC:
=-590000-55000/15%*(1-1/1.15^5)=-774368.5304
NPV of LCC:
=-110000-180000/15%*(1-1/1.15^5)=-713387.9176
When the WACC increases to 15%, the NPV of costs are now lower for LCC than HCC.
Explain your answer and the reason this result occurred.
The reason is that when you discount at a higher rate you are
making negative CFs smaller thus improving the NPV.
Kim Inc. must install a new air conditioning unit in its main plant. Kim must install...
Kim Inc. must install a new air conditioning unit in its main plant. Kim must install one or the other of the units; otherwise, the highly profitable plant would have to shut down. Two units are available, HCC and LCC (for high and low capital costs, respectively). HCC has a high capital cost but relatively low operating costs, while LCC has a low capital cost but higher operating costs because it uses more electricity. The costs of the units are...
Kim Inc. must install a new air conditioning unit in its main plant. Kim must install one or the other of the units; otherwise, the highly profitable plant would have to shut down. Two units are available, HCC and LCC (for high and low capital costs, respectively). HCC has a high capital cost but relatively low operating costs, while LCC has a low capital cost but higher operating costs because it uses more electricity. The costs of the units are...
Kim Inc. must install a new air conditioning unit in its main plant. Kim must install one or the other of the units; otherwise, the highly profitable plant would have to shut down. Two units are available, HCC and LCC (for high and low capital costs, respectively). HCC has a high capital cast but relatively low operating costs, while LCC has a low capital cost but higher operating costs because it uses more electricity. The costs of the units are...
OOSING MANDATORY PROJECTS ON THE BASIS OF LEAST COST m Inc. must install a new air conditioning unit in its main plant. Kim must install one or the other of the units; otherwise, the highly profitable plant ould have to shut down. Two units are available, HCC and LCC (for high and low capital costs, respectively). HCC has a high capital cost but relatively love erating costs, while LCC has a low capital cost but higher operating costs because it...
Kim Inc. must install a new air conditioning unit in its main plant. Kim must install one or the other of the units; otherwise, the highly profitable plant would have to shut down. Two units are available, HCC and LCC (for high and low capital costs, respectively). HCC has a high capital cost but relatively low operating costs, while LCC has a low capital cost but higher operating costs because it uses more electricity. The costs of the units are...
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A firm with a 14% WACC is evaluating two projects for this year's capital budget. After-tax cash flows, including depreciation, are as follows: 0 1 2 3 4 5 Project M -$24,000 $8,000 $8,000 $8,000 $8,000 $8,000 Project N -$72,000 $22,400 $22,400 $22,400 $22,400 $22,400 Calculate NPV for each project. Round your answers to the nearest cent. Do not round your intermediate calculations. Project M $ Project N $ Calculate IRR for each project. Round your answers to two decimal places. Do...