IntegrativeConflicting

RankingsThe 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

22%,

and HFGC managers believe that

22%

is a reasonable figure for the firm's cost of capital. To sustain a high growth rate, the HFGC 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 firm's production capacity, and the second project involves introducing one of the firm's existing products into a new market. Cash flows from each project appear in the following table:

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.

a.Calculate the NPV for both projects. Rank the projects based on their NPVs.

b.Calculate the IRR for both projects. Rank the projects based on their IRRs.

c.Calculate the PI for both projects. Rank the projects based on their PIs.

d.The firm can only afford to undertake one of these investments. What do you think the firm should do?

Year		Plant expansion		Product introduction
0		$4,000,000		$600,000
1		$3,000,000		$400,000
2		$2,500,000		$325,000
3		$2,750,000		$375,000
4		$2,750,000		$400,000

a.The NPV of the plant expansion project is $_______. (Round to the nearest dollar.)

The NPV of the product introduction project is $_______. (Round to the nearest dollar.)

According to the NPV method, which project should the firm choose?(Select the best answer below.)

Product introduction

Plant expansion

b. The IRR of the plant expansion project is ________%. (Round to two decimal places.)

The IRR of the product introduction project is _____%. (Round to two decimal places.)

According to the IRR method, which project should the firm choose?(Select the best answer below.)

Plant expansion

Product introduction

c.The PI of the plant expansion project is _____. (Round to two decimal places.)

The PI of the product introduction project is ______. (Round to two decimal places.)

According to the PI method, which project should the firm choose?(Select the best answer below.)

Product introduction

Plant expansion

d.If the firm can only afford to undertake one of these investments, which project should the firm choose?(Select the best answer below.)

Product introduction

Plant expansion