QUESTION 3 a) The HF Company has been expanding very rapidly in recent years, making its shareholders rich in the process. The average annual rate of return on the stock in the past few years has been 20 percent, and HF Company managers believe that 20 percent is a reasonable figure for the firm's cost of capital. To sustain a high growth rate, HF CEO argues that the company must continue to invest in projects that offer the highest rate of return possible. Two projects are currently under review. The first is an expansion of the firm's production capacity, and the second involves introducing one of the firm's existing products into a new market. Cash flows from each project appear in the following table: Year Plant expansion (RM000) Product introduction (RM'000) 0 -3,500 -500 1 1,500 250 2 2,000 350 3 2,500 375 4. 2,750 425 11 i) Calculate NPV, IRR and Pl for both projects. (10 marks) ii) Rank the projects based on their NPV, IRR and PI. (2 marks) iii) Do the rankings in part ii) agree or not? If not, why not? (3 marks) b) Refer to Part a), the firm can afford to undertake only one of these investments, and the CEO favors the product introduction because it offers a higher rate of return (i.e. a higher IRR) than the plant expansion. What do you think the firm should do? Why