co budgeting CHOOSING MANDATORY PROJECTS ON THE BASIS OF LEAST COST mine must install new conditioning in its main piant must install one of the her of the otherwise, the highly r cos, respective HCC has a lot t o werwing costs, which a low caption but higher sering ead have to w because more a t . The cost of the h other HCC LCC -$500,000 $45.000 $45.000 $45.000 $45.000 160,000 $180,000 $180,000 -$180.000 $180.000 3. Which unit would you recommend 1. Since all of the cash flows are negative, the wilde negative and we do not prettes IL Since all of the can flows are negative, the NPV be called and an art TIL SINCE of the cash rows are negative, the NPV's we be negative and we do not accept any propeta n g . IV. Since we are coming out the chosen would be the one that had the lower NPV of costs. Since LCCNV of costs that would be V. Since we are examining costs, the chosen would be the one that had the lower of Since MCCNPV of cost is tower CCCC b. Kim's controller wanted to know the trs of the two projects, what would you be him? 1. The of each project will be positive at a lower WACC. II. There are multiples for each project 11. The IRR of each project is negative and therefore not useful for decision-making IV. The IRR cannot be calculated because the cash flows are all one sign. A change of V. The IRR cannot be calculated because the cash flows are in the form of an anity would be -Select- c. If the WACC rose to 11% would this sect your recommendation I Since all of the cash rows are negative, the NPV's will be negative and we do not accept any project s are the 11. When the WACC increases to 119, the NPV of costs are now lower for LoC than HCC. II. When the WACC increases to 119, the NPV of costs are now lower for OCan LCC. IV. When the WACC increases to 119, the IRR for LCC greater than the IRR for CC, LCC de chosen V. When the WACC increases to 11%, the IRR for HCCI greater than the IR C C, HCC odchon Explain your answer and the reason this result occurred 1. The reason is that when you discount at a higher rate you are making negative che higher and is lower the 11 The reason is that when you discount at a higher rate you are making negative c a r and lows . Ill. The reason is that when you decount at a Nigher role you are making negatives are th eroving the NY IV. The reason is that when you discount agerate you are making negative C rew V. The reason is that when you discount aaherrate you are making negative che imprung 80 Ch 11: End-of-Chapter Problems - The Basics of Capital Budgeting CHOOSING MANDATORY PROJECTS ON THE BASIS OF LEAST COST Kim Inc. must install a new air conditioning unit in its main plant. Kim must install one or the other of the units; otherwise, the highly profitable plant would have to shut down. Two units are available, HC 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 5.5%. -$590,000 -$90,000 $45,000 $180,000 -$45,000 -$180,000 $45,000 $180,000 - $45,000 -$180,000 $45,000 $180,000 a. Which unit would you recommend L. Since all of the cash rows are negative, the IRR'S will be negative and we do not accept any project that has a negative IRR. IL. Since all of the cash flows are negative, the NPV's cannot be calculated and an alternative method must be employed IIL. 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. TV. 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 HCCS, LCC would be chosen. V. Since we are examining costs, the une 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 D. U Kini's controler wanted to know the tes of the two projects, what would you tell him? 1. The IRR of each project will be positive at a lower WACC. 11. There are multiple 's for each project TII. The IRR of each project is negative and therefore not useful for decision-making, 1. The I cannot be calculated because the cash rows we all one sign. A change of sign V. The cannot be calculated because the cash flows are in the form of an annuity. c. the WACC rose to 11 would this affect your recommendation? Lincel of the cash flows are negative, the NPV's will be negative and we do not accept any project that has a negative NPV I when the WACC increases to 11 the NPV of costs are now lower for LCC than HCC L. When the WACC increases to 114, the of costs are now lower for Hathan LCC TV, when the WACC increases to 11%, the IRR for LCC is greater than the IRR for MCC, LCC would be chosen wen De WACC increases to 11, the IRR for HCC is greater than the IRR for LCC, HCC would be chosen E n you and the reason this result occurred The reasons when you discount t he rate you are making negative c her and then the W. There when you t here you ar e improving the NPV