Kim Inc. must instala 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, HOC and LCC (for high and low capital costs, respectively). HCC has a high capital cost but relatively low operating costs, white 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% HCC LCC - 5510,000 -$45,000 -345,000 -$45,000 -$45,000 -$45,000 -$100,000 -$175,000 -$175,000 -$175,000 -$175,000 -$175.000 2. Which unit would you recommend? 1. Since we are examining costs, the unit 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 11. 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 HCC'S, LCC would be chosen In. Since all of the cash flows are negative, the NPV's cannot be calculated and an alternative method must be employed 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. Since all of the cash flows are negative, the Re's will be negative and we do not accept any project that has a negative 1 Dr Kim's controller wanted to know the IRR of the two projects, what would you tell him? 1. The IRR of each project is negative and therefore not useful for decision-making 11. 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 III. The IRR cannot be calculated because the cash flows are in the form of an annuity IV. The IRR of each project will be positive at a lower WACC There are multiple TRA's for each project c. If the WACC rose to 11would this affect your recommendation c. If the WACC rose to 11% would this affect your recommendation? L When the WACC increases to 11%, the IRR for HCC is greater than the IRR for LCC, HCC would be chosen 11. 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, III. When the WACC increases to 11%, the NPV of costs are now lower for LCC than HCC IV. When the WACC increases to 11%, the NPV of costs are now lower for HCC than LCC. V. When the WACC increases to 11%, the IRR for LCC is greater than the IRR for HCC, LCC would be chosen Select Why do you think this result occurred? I. The reason is that when you discount at a higher rate you are making negative CFs higher thus improving the NPV. IL The reason is that when you discount at a higher rate you are making negative CFs higher and this lowers the NPV. TIL. The reason is that when you discount at a higher rate you are making negative CFs smaller and this lowers the NPV. IV. The reason is that when you discount at a higher rate you are making negative CFs smaller thus improving the NPV. V. The reason is that when you discount at a higher rate you are making negative CFs higher thus improving the IRR. Select
