ABC Company currently produces a single product the Widget The company is considering producing a second product called the Fidget ABC Company has already paid a consulting firm $50,000 to identify two possible project scenarios available to ABC Company in order to get into the Fidget business Assume that ABC Company can sell all of the Widgets and Fidgets it produces at current market prices, and that Widgets and Fidgets sell for the same price Project 1 is the construction of a new factory to exclusively produce Fidgets This new factory would be located on a piece of land that ABC Company currently owns and was planning to sell for $900,000 Project 2 is a partial renovation of the existing Widget factory in order to create a new production line to produce fidgets The renovation would mean a decline in the ability of the company to produce as many Widgets as it has in the part, but overall, production capabilities would increase The initial cost of both Project 1 and Project 2 are approximately the same The weighted average cost of capital (WACC) for ABC Company is 8 However, the company makes an adjustment to the WACC for the purpose of computing NPV Based upon the perceived risk of the project Information regarding the two projects is presented below Measure Project 1 Project 2 IRR 11 8 NPV $140,000 $175,000 Payback Period 6 4 years 6 8 years Risk Level High Low If the projects are mutually exclusive, which project(s) should the company select, and why is that the correct decision Accept both projects, because the NPV of both projects is positive Project 2 because it has the highest NPV Project 1 because it has the highest IRR and shortest payback period Project 2 because it has the lowest risk and lowest IRR If the projects are independent, which project(s) should the company select and, which is that the correct decision Accept both projects, because the IRR of both projects meets or exceeds the WACC Accept both projects, because the NPV of both projects is positive Project 2 because it has the highest NPV Project 2 because it has the highest IRR If ABC company had paid $125,000 to the consulting firm, would this have an impact on the NPV of the project and why It would have no effect on the NPV of the projects, because the consulting fees do not reflect an incremental cash flow It would have no effect on the NPV of the projects, because the higher consulting fees would be offset by better future performance It would increase the NPV of both projects because the consultants would have identified better solutions It would decrease the NPV of both projects because of the higher cost

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ABC Company currently produces a single product the Widget. The company is considering producing a second product called the Fidget. ABC Company has already paid

ABC Company currently produces a single product the Widget. The company is considering producing a second product called the Fidget. ABC Company has already paid a consulting firm $50,000 to identify two possible project scenarios available to ABC Company in order to get into the Fidget business. Assume that ABC Company can sell all of the Widgets and Fidgets it produces at current market prices, and that Widgets and Fidgets sell for the same price.

Project #1 is the construction of a new factory to exclusively produce Fidgets. This new factory would be located on a piece of land that ABC Company currently owns and was planning to sell for $900,000.

Project #2 is a partial renovation of the existing Widget factory in order to create a new production line to produce fidgets. The renovation would mean a decline in the ability of the company to produce as many Widgets as it has in the part, but overall, production capabilities would increase.

The initial cost of both Project #1 and Project #2 are approximately the same. The weighted average cost of capital (WACC) for ABC Company is 8%. However, the company makes an adjustment to the WACC for the purpose of computing NPV Based upon the perceived risk of the project. Information regarding the two projects is presented below:

Measure	Project #1	Project #2
IRR	11%	8%
NPV	$140,000	$175,000
Payback Period	6.4 years	6.8 years
Risk Level	High	Low

If the projects are mutually exclusive, which project(s) should the company select, and why is that the correct decision?
1. Accept both projects, because the NPV of both projects is positive.
2. Project #2 because it has the highest NPV.
3. Project #1 because it has the highest IRR and shortest payback period.
4. Project #2 because it has the lowest risk and lowest IRR.

If the projects are independent, which project(s) should the company select and, which is that the correct decision?
1. Accept both projects, because the IRR of both projects meets or exceeds the WACC.
2. Accept both projects, because the NPV of both projects is positive.
3. Project #2 because it has the highest NPV.
4. Project #2 because it has the highest IRR.

If ABC company had paid $125,000 to the consulting firm, would this have an impact on the NPV of the project and why?
1. It would have no effect on the NPV of the projects, because the consulting fees do not reflect an incremental cash flow.
2. It would have no effect on the NPV of the projects, because the higher consulting fees would be offset by better future performance.
3. It would increase the NPV of both projects because the consultants would have identified better solutions.
4. It would decrease the NPV of both projects because of the higher cost.