Kimine. 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 cast but relatively low operating costs, while LCC has a low capital cost but higher operating costs because it uses more sectricity. The costs of the units are shown here. Om's WACC M. 2 5 HCC LCC -5610,000 -$50,000 -$50,000 -550,000 -$50,000 -$50,000 -$110,000 -5170,000 -$170,000 -$170,000 -$170,000 -$170,000 3. Which unit would you recommend? 1. Since the cash flows are negative, the NPV's will be negative and we do not accept any project that has a negative NPV 11. 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 Sincere camining costs, the unit chosen would be the one that had the lower NPV of costs. Since LCCNPV of costs lower than HCC, LOC would be chosen IV. Since we we camining costs the unit chosen would be the one that had the lower NPV of costs. Since HCCS NPV of costs lower than LCCW, MOC chosen W. Since all of the cash flows are negative, the NPV's cannot be calculated and an alternative method must be employed, Kim's controler wanted to know the Rs of the two projects, what would you tell him? There we multiples for each project 1. The of each project is negative and therefore not used for decision-making III. The TRR cannot be called because the cash flows are all one sign. A change of sign would be needed in order to the IV. The cannot be calculated because the cash flows are in the form of an annut The IRR of each project will be positive at a lower WACC If the WACC to 10% would this fact your recommendation 1. When the WACC into the NPV tore now lower for HC than to I W WACCE 10 the for greater than the HCC, LCC would be the Twenthe WACC increases to the IRR for Heater than the RLCC, HCC would be the IV. Since the cash gative the will be negative and we do not accept any act that has negative NPW WAG 10 NPV of couts are now lower for LOC CE b. If Kim's controller wanted to know the IRR of the two projects, what would you tell him? I. There are multiple IRR's for each project II. The IRR of each project is negative and therefore not useful for decision-making. III. 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 TV. The IRR cannot be calculated because the cash flows are in the form of an annuity. V. The IRR of each project will be positive at a lower WACC. c. If the WACC rose to 10% would this affect your recommendation? 1. When the WACC increases to 10%, the NPV of costs are now lower for HCC than LCC 11. When the WACC increases to 10%, the IRR for LOC is greater than the IRR for HOC, LCC would be chosen ITLWhen the WACC increases to 10%, the IRR for HCC is greater than the IRR for LCC, HCC would be chosen IV. 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. V. When the WACC increases to 10%, the NPV of costs are now lower for LCC than HCC. Select Why do you think this result occurred? 1. The reason is that when you discount at a higher rate you are making negative CFs smaller thus improving the NPV. IL. The reason is that when you discount at a higher rate you are making negative CFs higher thus improving the IRR. m. The reason is that when you discount at a higher rate you are making negative CFs higher thus improving the NPV, IV. The reason is that when you discount at a higher rate you are making negative CFs higher and this lowers the NPV. V. The reason is that when you discount at a higher rate you are making negative CFs smaller and this lowers the NPV. a -Select
