Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

You have just started your summer internship, and your boss asks you to review a recent analysis that was done to compare three alternative proposals

image text in transcribedimage text in transcribed

You have just started your summer internship, and your boss asks you to review a recent analysis that was done to compare three alternative proposals to enhance the firm's manufacturing facility. You find that the prior analysis ranked the proposals according to their IRR, and recommended the highest IRR option, Proposal A. You are concerned and decide to redo the analysis using NPV to determine whether this recommendation was appropriate. But while you are confident the IRRs were computed correctly, it seems that some of the underlying data regarding the cash flows that were estimated for each proposal was not included in the report. For Proposal B, you cannot find information regarding the total initial investment that was required in Year 0. And for Proposal C, you cannot find the data regarding additional salvage value that will be recovered in Year 3. Here is the information you have (in $ millions): Proposal IRR Year 0 Year 1 Year 3 A $100 $30 $88 Year 2 $153 $206 $0 60.0% 58.3% 57.4% B $0 ? - $100 $95 $204 + ? $37 (Round to two decimal places.) Proposal IRR Year 0 Year 2 Year 3 Year 1 $30 A 60.0% - $100 $153 $88 B 58.3% $0 $206 $95 C 57.4% -$100 $37 $0 $ Suppose the appropriate cost of capital for each alternative is 10%. Using this information, determine the NPV of each proposal. The NPV for proposal A is $ million. (Round to two decimal places.) The NPV for proposal B is $ million. (Round to two decimal places.) The NPV for proposal C is $ million. (Round to two decimal places.) Which project should the firm choose? Which project should the firm choose? The firm should choose (Select from the drop-down menu.) Why is ranking the projects by their IRR not valid in this situation? (Select the best choice below.) O A. Ranking the projects by their IRR is not valid in this situation because the projects have different NPVs and different patterns of cash flows over time. O B. Ranking the projects by their IRR is not valid in this situation because the projects have different discount rates and different patterns of cash flows over time. C. Ranking the projects by their IRR is not valid in this situation because the projects have different scales and different patterns of cash flows over time. D. Ranking the projects by their IRR is not valid in this situation because the projects have different scales and different project lifecycles

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Advanced Stocks Analysis A Fundamentalist Approach

Authors: Luciano Storelli ,Storelli And Pepe Stocks Investments

1st Edition

979-8395523006

More Books

Students also viewed these Finance questions

Question

What is the best conclusion for Xbar Chart? UCL A X B C B A LCL

Answered: 1 week ago