Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

12. pt 1 CHOOSING MANDATORY PROJECTS ON THE BASIS OF LEAST COST Kim Inc. must install a new air conditioning unit in its main plant.

12. pt 1

CHOOSING MANDATORY PROJECTS ON THE BASIS OF LEAST COST

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 shown here. Kim's WACC is 5%.

0 1 2 3 4 5
HCC -$590,000 -$50,000 -$50,000 -$50,000 -$50,000 -$50,000
LCC -$100,000 -$170,000 -$170,000 -$170,000 -$170,000 -$170,000

Which unit would you recommend?

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.

Since we are examining costs, the unit chosen would be the one that had the lower NPV of costs. Since LCC's NPV of costs is lower than HCC's, LCC would be chosen.

Since all of the cash flows are negative, the NPV's cannot be calculated and an alternative method must be employed.

Since all of the cash flows are negative, the NPV's will be negative and we do not accept any project that has a negative NPV.

Since all of the cash flows are negative, the IRR's will be negative and we do not accept any project that has a negative IRR.

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

The Psychology Of Trading Tools And Techniques For Minding The Markets

Authors: Brett N. Steenbarger

1st Edition

0471267619, 9780471267614

More Books

Students also viewed these Finance questions

Question

Describe new developments in the design of pay structures. page 501

Answered: 1 week ago