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, HCC 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 is $5\%.$

a$.$ Which unit would you recommend?

I. 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.

II$.$ Since all of the cash flows are negative, the NPV$\text{'}$s cannot be calculated and an alternative method must be employed.

III. Since all of the cash flows are negative, the NPV$\text{'}$s will be negative and we do not accept any project that has a negative NPV$.$

IV$.$ Since we are examining costs, the unit chosen would be the one that had the lower NPV of costs. Since LCC$\text{'}$s NPV of costs is lower than HCC$\text{'}$s$,$ LCC would be chosen.

V$.$ Since we are examining costs, the unit chosen would be the one that had the lower NPV of costs. Since HCC$\text{'}$s NPV of costs is lower than LCC$\text{'}$s$,$ HCC would be chosen.

b$.$ If Kim's controller wanted to know the IRRs of the two projects, what would you tell him?

I. The IRR of each project will be positive at a lower WACC.

II$.$ There are multiple IRR's for each project.

III. 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 sign would be needed in order to calculate the IRR.

V$.$ The IRR cannot be calculated because the cash flows are in the form of an annuity.

c$.$ If the WACC rose to $10\%$ would this affect your recommendation?

I. Since all of the cash flows are negative, the NPV$\text{'}$s will be negative and we do not accept any project that has a negative NPV$.$

II$.$ When the WACC increases to $10\%,$ the NPV of costs are now lower for LCC than HCC$.$

III. When the WACC increases to $10\%,$ the NPV of costs are now lower for HCC than LCC$.$

IV$.$ When the WACC increases to $10\%,$ the IRR for LCC is greater than the IRR for HCC$,$ LCC would be chosen.

V$.$ When the WACC increases to $10\%,$ the IRR for HCC is greater than the IRR for LCC$,$ HCC would be chosen.