20. Problem 11.14 (Choosing Mandatory Projects on the Basis of Least Cost) ots A-Z LD eBook Kim Inc. must install a new air conditioning unit in its main plant. Kim must Instal 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 7%. 0 1 2 HCC LCC -$610,000 -$45,000 -$45,000 -$45,000 -$45,000 -$45,000 -$90,000 -$180,000 -$180,000 -$180,000 -$180,000 -$180,000 a. Which unit would you recommend? 1. Since all of the cash flows are negative, the NPV's cannot be calculated and an alternative method must be employed. II. Since altyof the cash flows are negative, the NPV's will be negative and we do not accept any project that has a negative NPV. 111. 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 IV. 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. Since we are examining costs, the unit chosen would be the one that had the lower NPV of costs. Since LCCS NPV of costs is lower than HCC's, LCC would be chosen -5 b. 14 Kim's controller wanted to know the ters of the two projects, what would you tell him? 1. The IRR cannot be calculated because the cash flows are in the form of an annuity 11. The IRR of each project will be positive at a lower WACC. TII. There are multiple IRR's for each project. IV. The IRR of each project is negative and therefore not useful for decision-making, V. 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 TRR. c. If the WACC rose to 14% would this affect your recommendation? 1. When the WACC increases to 14%, the NPV of costs are now lower for LCC than HCC. II. When the WACC increases to 14%, the NPV of costs are now lower for HCC than LOC . When the WACC increases to 14%, the RR for LCC is greater than the IRR for HCC, LOC would be chosen IV. When the WACC increases to 14%, the IRR for HCC greater than the IRR for LCC, HCC would be chosen 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. Why do you think is result occurred? I The reason is that when you discount at a higher rate you are making negative caller and this lower the Nov. n. The reason is that when you discount at a higher rate you are making negative che smaller thus improving the NP. II. The reason is that when you discount at a higher rate you are making negative ch higher thus improving the IRR. IV. The reason is that when you discount at a higher rate you are making negative is higher thus improving the NPV. The reason is that when you discount at a higher rate you are making negative che higher and this towers the NPV. Grade it Now Save & Continue Continue without saving MacBook Pro : > + $ 4 % 5 & 7 1 0 3 8 9 E 70 Y U 1 0 P D F G H J K V > C V B N M 4 all command option