Problem 11-14 Choasing mandatory prajects an the basis of least cost Kim Inc. must install a new air conditioning unit in its main plant. Kim must install ane ar the ather of the units; otherwise, the highly profitable plant wauld have ta shut down. Two units are available, HCC and LCC (far high and low capltal costs, respectively). HCC has a high capital cost but relativelyy low operating costs, while LcC has a low capital cost b thigher operating costs because it uses more electricity. The costs of the units are shown here. Kim's WACC is 5.5% 0 2 34 5 HCC $600,000 -s45,000 $45,000 -$45,000 $45,000 $45,0a0 LCC-$100,000-$170,000-$170,000-$170,000-$170,000-$170,000 .which unit would you recommend? Since we are exemining costs, the unit chosen would be the one that hed the lower PV of costs, Since LOC's PV of costs is lower then HCC's, LOC would be chosen is lower than LCC's, HCC would be chosen. -Select- Kim's controller wanted to know the TRRs of the two oroiects, what would vou l him? h. tant chproict e pogstive and therefore not useful ordecision-making cash flows are all one sign. A change af sign would be nceded in order to calculate the IRR. R cannot ba calculated because t I. The Ins t n the form of an annuity The 128 of urh prict illL paritiu Select- c. If the WACC rose to 119% wauld this affect your recommendation? e GGnne e 106ta 10 fo LOC is areater than the TRD foe HCC. ICC wnuld be chasen. II. When the WACC increases to 11% , the IRR for HCC is greater than the IRR for LCC, HCC would be chosen. any project that has a negative NPV. When the wacc increascs to 113 the PV of cocts are noe lower for LCc than HCC -Select- # why this result acr L The reason is that when vau discount at a higher rate you are making negative CFs smaller thus improving the NPV. . 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 nagative CFs smaller and this lawers the NPV. -Select