Kim Inc, must install a new air-condtioning unit in its main plant, Kim must install one or the other of the units; otherwise, the highily profitable piant would have to shut down. Two units are available, HCC and LCC (for high and fow eapital costs, respectively). HCC has a high eapital cost but relatively low operating costs, while LCC has a low copltal cost but higher operating costs because it uses more electricity. The costs of the units sre shown here. Kim's WACC is 5% a. Which unit would you recommend? 1. Since an of the cash flows are negative, the 1AR's will be negative and we do not accept any project that has a negative tra. It. Since all of the cash flows are negative, the NPV's cannot be calculated and an alternative method must be employed. III. 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 NPY. TV. 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, LOC 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 s NPV of costs is lower than LCC's, HCC would be chasen. b. If Kim's controlier wanted to know the IRRs of the two projects, what would you tell him? 1. The IRR of each project will be positive ot a lower WACC. II. There are multiple IRR's for each project. 111. The 1RR of each project is negative and therefore not useful for decision-making. IV. The IRt cannot be calculated becouse the cash flows are all one sign. A change of sign would be needed in order to calculate the IRR. V. The 1 RR cannot be calculated becouse the cash flows are in the form of an annuity. 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? 1. 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. 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. Why do you think this result occurred? 1. The reason is that when you discount at a higher rate you are making negative CFs higher and this lowers the NPV. II. The reason is that when you discount at a higher rate you are making negative CFs smaller and this lowers the NPV. III. The reason is that when you discount at a higher rate you are making negative CFs smaller thus improving the NPV. IV. The reason is that when you discount at a higher rate you are making negative CFs higher thus improving the IRR. V. The reason is that when you discount at a higher rate you are making negative CFs higher thus improving the NPV. Continue without saving