Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

a. Which unit would you recommend? I. Since we are examining costs, the unit chosen would be the one that had the lower NPV of

image text in transcribed

a. Which unit would you recommend? I. 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. II. 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. III. Since all of the cash flows are negative, the NPV's cannot be calculated and an alternative method must be employed. IV. 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. V. 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. b. If Kim's controller wanted to know the IRRs of the two projects, what would you tell him? I. The IRR of each project is negative and therefore not useful for decision-making. II. 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. III. The IRR cannot be calculated because the cash flows are in the form of an annuity. IV. The IRR of each project will be positive at a lower WACC. V. There are multiple IRR's for each project. - Select- c. If the WACC rose to 14% would this affect your recommendation? I. When the WACC increases to 14%, the IRR for HCC is greater than the IRR for LCC, HCC would be chosen. II. 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. III. When the WACC increases to 14%, the NPV of costs are now lower for LCC than HCC. IV. When the WACC increases to 14%, the NPV of costs are now lower for HCC than LCC. V. When the WACC increases to 14%, the IRR for LCC is greater than the IRR for HCC, LCC would be chosen. -Select- Why do you think this result occurred? I. The reason is that when you discount at a higher rate you are making negative CFs higher thus improving the NPV. II. The reason is that when you discount at a higher rate you are making negative CFs higher and this lowers the NPV. III. The reason is that when you discount at a higher rate you are making negative CFs smaller and this lowers the NPV. IV. The reason is that when you discount at a higher rate you are making negative CFs smaller thus improving the NPV. V. The reason is that when you discount at a higher rate you are making negative CFs higher thus improving the 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

Step: 3

blur-text-image

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

Financial Accounting IFRS Principles

Authors: Ilse Lubbe, Goolam Modack, Alex Watson

4th Edition

0199049238, 9780199049233

More Books

Students also viewed these Accounting questions