Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

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

image text in transcribed

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, Kirm's WACC is 6%. HCC $600,000 $100,000 $180,000 $180,000 180,000 $180,000 $180,000 $55,000 $55,000 $55,000 $55,000 $55,000 LCC a. Which unit would you recommend? I. 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. 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 LCC's, HCC would be chosen III. 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. IV. Since all of the cash flows are negative, the NPV's cannot be calculated and an alternative method must be employed. 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 b. If Kim's controller wanted to know the IRRs of the two projects, what would you tell him? I. 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 II. The IRR cannot be calculated because the cash flows are in the form of an annuity III. The IRR of each project will be positive at a lower WACC. IV. There are multiple IRR's for each project. V. The IRR of each project is negative and therefore not useful for decision-making. c. If the WACC rose to 12% would this affect your recommendation? 1, when the WACC increases to 12%, the IRR ror LCC is greater than the IRR for HCC, LCC would be chosen. 11, when the WACC increases to 12%, the IRR for HCC is greater than the IRR for LCC, HCC would be chosen. 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 ?. when the WACC increases to 12%, the NPV of costs are now lower for LCC than HCC. V. when the WACC increases to 12%, the NPV of costs are now lower for HCC than LCC. Explain your answer and the reason this result occurred. I. The reason is that when you discount at a higher rate you are making negative CFs higher thus improving the IRR. II. The reason is that when you discount at a higher rate you are making negative CFs higher thus improving the NPV III. The reason is that when you discount at a higher rate you are making negative CFs higher and this lowers the NPV . The reason is that when you discount at a higher rate you are making negative CFs smaller and this lowers the NPV V. The reason is that when you discount at a higher rate you are making negative CFs smaller thus improving the NPV Session Timeout 58:5

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Introduction To The Financial Management Of Healthcare Organizations

Authors: Michael Nowicki

7th Edition

156793904X, 9781567939040

More Books

Students also viewed these Finance questions

Question

Monitor behavior and reward desirable behavior.

Answered: 1 week ago

Question

Explain the global implications for recruitment.

Answered: 1 week ago

Question

Describe what competencies and competency modeling are.

Answered: 1 week ago

Question

Summarize job design concepts.

Answered: 1 week ago