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Kim Inc. must install a pew air-conditioning unit in its main plant. Kim must install one or the other of the units; otherwise, the highly

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Kim Inc. must install a pew air-conditioning unit in its main plant. Kim must install one or the other of the units; otherwise, the highly proficable plant would have to shut down. Two units are mallable, MCC and tCC (for high and low capital costs, respectively). HCC has a high capital cost but relatively low operating costs, while teC Nas 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 7%. a. Which unit would you recommend? L. Since we are examining costs, the unit chasen would be the one that had the lower NPV of costs, Since HCCs NPV of costs is lower than LCCS, HCC would be chosen. 11. Since we are examining costs, the unt chosen would be the one that had the lower NPV of costs. Since LCC's NPV of costs is lower than HCCS, LCC would be chosen. III. Since all of the cash flows are negative, the NPVs cannot be calculated and an alternative method must be emplored. N. Since all of the canh flows are negative, the NPVs 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 IRR's will be negative and wo do not accept any project that has o negative lar. b. If Kim's controller wanted to know the 1RRs of the two projects, what would you tell him? L. The IRR of each project is negative and therefore not useful for decision-making II. 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. III. The IRP cannot be caiculated because the cash flows are in the form of an annulty. N, The IRR of each project will be postive at a lower WACC. v. There are multiple int's for each project. c. If the WACC rose to 14% would this affect your recommendation? 1. When the WACC increases to 1446, 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. III. When the WACC increases to 14%, the NPV of costs are now lower for tCC than HCC. TV. When the WACC increases to 14%, the NPV of costs are now lower for HCC than LCC. . When the WACC increases to 14%, the IRR for LCC is greater than the IRR for HCC, LCC 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 thus improving the NPV: 11. The reason is that when you discount at a higher rate you are making negative CFs higher and this lowers the NPV. 1II. 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 ace making negative CFs smaller thus improving the NPV. V. The reason is that when you discount at a higher rate you are making negative Cls higher thus improving the IRR

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