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higher operating costs because it uses more electricity. The costs of the units are shown here. Kim's WACC is 7.5%. a. Which unit would you
higher operating costs because it uses more electricity. The costs of the units are shown here. Kim's WACC is 7.5\%. a. Which unit would you recommend? I. 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. 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. chosen. chosen. V. Since all of the cash flows are negative, the NPV's cannot be calculated and an alternative method must be employed. b. If Kim's controller wanted to know the IRRs of the two projects, what would you tell him? I. There are multiple IRR's for each project. II. The IRR of each project is negative and therefore not useful for decision-making. III. 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. IV. The IRR cannot be calculated because the cash flows are in the form of an annuity. V. The IRR of each project will be positive at a lower WACC. c. If the WACC rose to 15% would this affect your recommendation? I. When the WACC increases to 15%, the NPV of costs are now lower for HCC than LCC. II. When the WACC increases to 15%, the IRR for LCC is greater than the IRR for HCC, LCC would be chosen. III. When the WACC increases to 15%, the IRR for HCC is greater than the IRR for LCC, HCC would be chosen. 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. When the WACC increases to 15%, the NPV of costs are now lower for LCC than HCC
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