c. What does your answer to part b tell you about this project IRR d. Should Froxple invest m this project if its cost of capital is? What if the cost P10-26 Integrative-Conflicting Rankings The High-Flying Growth Company (HEGC) has been growing very rapidly in recent years, making its shareholders rich in the process The average annual rate of return on the stock in the last few years has been 20%, and HFGC managers believe that 20% is a reasonable figure for the firm's cost of capital. e. In general, when faced with a project like this, how should a firm decide whether tinue to invest in projects that offer the highest rate of return possible. Two projects H | | | | 15% % % 30%15 of capital is 15% to invest in the project or reject it? 5 To sustain a high growth rate, the HFGC CEO argues that the company must comece are currently under review. The first is an expansion of the firm's production capacity and the second project involves introducing one of the firm's existing products into new market. Cash flows from each project appear in the following table. a. Calculate the NPV, IRR, and PI for both projects. b. Rank the projects based on their NPVS, IRRs, and Pls. c. Do the rankings in part b agree or not? If not, why not? d. The firm can only afford to undertake one of these investments, and the CEO favors the product introduction because it offers a higher rate of return (that is a higher IRR) than the plant expansion. What do you think the firm should do? Why? c. What does your answer to part b tell you about this project IRR d. Should Froxple invest m this project if its cost of capital is? What if the cost P10-26 Integrative-Conflicting Rankings The High-Flying Growth Company (HEGC) has been growing very rapidly in recent years, making its shareholders rich in the process The average annual rate of return on the stock in the last few years has been 20%, and HFGC managers believe that 20% is a reasonable figure for the firm's cost of capital. e. In general, when faced with a project like this, how should a firm decide whether tinue to invest in projects that offer the highest rate of return possible. Two projects H | | | | 15% % % 30%15 of capital is 15% to invest in the project or reject it? 5 To sustain a high growth rate, the HFGC CEO argues that the company must comece are currently under review. The first is an expansion of the firm's production capacity and the second project involves introducing one of the firm's existing products into new market. Cash flows from each project appear in the following table. a. Calculate the NPV, IRR, and PI for both projects. b. Rank the projects based on their NPVS, IRRs, and Pls. c. Do the rankings in part b agree or not? If not, why not? d. The firm can only afford to undertake one of these investments, and the CEO favors the product introduction because it offers a higher rate of return (that is a higher IRR) than the plant expansion. What do you think the firm should do? Why
