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 out higher operating costs because it uses mare electricity. The costs of the units are shown here. Kim's WACC is 6%. 2 3 HCC LCC -5610,000 -$50,000 -$50,000 -$50,000 -$50,000 -$50,000 -590,000 -$180,000 $180,000 -$180,000 -$180,000 $180,000 a. Which unit would you recommend? 1. Since all of the cash flows are negative, the NPV's cannot be calculated and an alternative method must be employed II. 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 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 LCCS, HCC would be IV. Since all of the cash flows are negative, the tre's will be negative and we do not accept any project that has a negative IRR. V. Since we are examining costs, the unit chosen would be the one that had the lower NPV of eests. Since LOCA NPV of costs is lower than HCCS, LCC would be chosen b. Ir Kim's controller wanted to know the ters of the two projects, what would you tell him? 1. The IRR cannot be calculated because the cash flows are in the form of an annuity 11. The IRR of each project will be positive at a lower WACC III. There are multiple IRR's for each project IV. The IRR of each project is negative and therefore not well for decision-making V. The IRR cannot be calculated because the cash flows are all are on change of non would be needed in order to calculate the c. If the WACC rose to 12% would this affect your recommendation? 1. When the WACC increases to 12%, the NPV of costs are now lower for LCC than HCC. II. When the WACC increases to 12%, the NPV of costs are now lower for HCC than LCC, m. When the WACC increases to 12%, the IRR for LCC is greater than the IRR for HCC, LCC would be chosen IV. When the WACC increases to 12%, the IRR for HCC is greater than the TRUR for LCC, HCC would be chosen V. 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. Sol Why do you think this result occurred? I. The reason is that when you discount at a higher rate you are making negative CFs smaller and this lowers the NPV. 11. The reason is that when you discount at a higher rate you are making negative CFs smaller thus improving the NPV. III. The reason is that when you discount at a higher rate you are making negative CFs higher thus improving the IRR. IV. The reason is that when you discount at a higher rate you are making negative Cfs higher thus improving the sdpv. V. The reason is that when you discount at a higher rate you are making negative CFs higher and this lowers the NPV. -Select
