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ebook Kam Inc. must instala new air-conditioning unit in its main plant. Kim miast 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). HOC has a high capital cost but relatively low operating costs, while has a low capital cost but higher operating costs because it uses more electricity. The costs of the units are shown here. Km's WACC 8 6.5% 0 2 3 HCC 5600,000 -$55,000 -$55,000 -$55,000 $55,000 -555,000 LCC -$90,000 $180,000 -$180,000 $180,000 $180,000 $180,000 2. Which unit would you recommend I Since of of the cash flows are negative, there's will be negative and we do not accept any project that has a negative RR. II. Since of the cash flows are negative, the NPV's cannot be calculated and internative method must be employed 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 IV. Since we are examining costs, the unit chosen would be the one that had the lower Ny of costs. Gece LOC'S NIV of costs is lower than HCO'S, LOC would be chosen V. Since we are examining costs, the unit chosen would be the one that had the tower NPV of costs. Snc MCCNPV of costs lower than LCC HOC wood be chosen D. U Kim's controler wanted to know the IRR of the two projects, what would you tell him? L. The mut of each project we be positive at lower WACG 11. There are multiples for each och m The RR of each project is negative and therefore not useful for decision making IV The IRR cannot be calculated because the cash flows are alone. A change of son would be needed in order to calculate the The TRR cannot be calculated because the cash flows are in the form of an annuity TV the WACC to 135 would this affect your commendation If the WACC rose to 13% would this affect your recommendation? 1. 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 II. When the WACC increases to 13%, the NPV of costs are now lower for LCC than HCC III. When the WACC increases to 13%, the NPV of costs are now lower for HOC than LCC IV. When the WACC increases to 13%, the IRR for CC is greater than the IRR for HCO, LCC would be chosen W. When the WACC increases to 13%, the IRR for HCC is greater than the 18 for LCC, HCC would be chosen Why do you think this result occurred 1. The reasons that when you discount at a higher rate you are making negative her and this owers the NPV The son is that when you discount as higher rate you are making negative smaler and the lower the NAV The reasons that when you discount at a higher rate you are making negative methus improving the NPV IV. The reason is that when you discount at a higher rate you are making negative Cogher thus improving the The censon is that when you discount at a higher rate you are making negative sicherthus improving the NPV