Integrative: Conflicting Rankings The High-Flying Growth Company (HFGC) 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 firms cost of capital. To sustain a high growth rate, HFGCs CEO argues that the company must continue to invest in projects that offer the highest rate of return possible. Two projects are currently under review. The first is an expansion of the firms production capacity, and the second involves introducing one of the firms existing products into a new market. Cash flows from each project appear in the following table.

year, plant expansion, product introduction

0. -3,500,000 -500,000

1 1,500,000 250,000

2. 2,000,000 350,000

3 2,500,000 375,000

4 2,750,000 425,000

A. Calculate the NPV, IRR, and PI for both projects.

B. Rank the projects based on their NPVs, IRRs, and PIs.

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?