Kim Inc. must instell a new air conditioning unit in its main plant. Kim must install one or the other of the unitsi otherwise, the highly profitable plant would have to shut down. Two units are available, HCC and LCC (for high and low copital 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 hers. Kim's WACo is 6.5%. HCC $590,000 45,000 $45,000 45,000 545,000$45,000 $110,000 $175,000 $175,000 $175,000 $175,000 $175,000 LCC a. Which unit would you recommend? I. Since all of the cash flowe are negative, the NPV's cannot be calculated and an alternative method must be employed II. Since all of tha cash flows are negative, tha NPV's wll bo negative and wa do not accapt any project that has a negativa NPV. tII. Since we are examining costs, the unit chosen would be the one that had the lower NPV of costs. Since HOC's NPV of costs is lower than LCC's, HCC would be chosen. IV. 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 V. 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 ???, LCC 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 cannot be calculated because the cash flowe are in the form of an annuity II. The IRR of cach praject wi be positive at a lower WACC. LII. Thare are multiple IRR's for aach project. rv. The IRR of each project is negative and therefore not useful for decision-making. V. 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 Select c. If the WACC roGe to 13% would this affect your nacom mendation? ? When the WACC incre ses to 13%, the NPV of costs are now lower for LCC than HCC. I. When the WACC increases to 139%, the NPV of costs are now lower for HCC than LCC. 111. when the wACC increases to 13%, the IRR for LCC is greater than the IRR for HCC, LCC would be chosen. tv. when the WACC increases to 13%, the IRR for HCC is greater than the IRR for LCC, HCC would be cho en. V. Since all of tha cash flows are negativa, tho NPV's will bo negative and we do not accapt any project that has a negativa NPV Explain your answar and the raason this rasult occurrad. 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 W. The reason is that when you discount at higher rate you are making negative CFs higher thus improving the NPV. v. The reason is that when you discount at a higher rate you are making negative CF higher and this loma?the NPV. Session 58:41