Question

Kim Inc. must install a new air conditioning unit in its main plant. Kim must install...

Kim Inc. 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 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 here. Kim's WACC is 5.5%.

0 1 2 3 4 5
HCC -$600,000 -$55,000 -$55,000 -$55,000 -$55,000 -$55,000
LCC -$110,000 -$175,000 -$175,000 -$175,000 -$175,000 -$175,000
  1. Which unit would you recommend?

    1. 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 HCC's, LCC would be chosen.
    2. Since we are examining costs, the unit chosen would be the one that had the lower NPV of costs. Since HCC's NPV of costs is lower than LCC's, HCC would be chosen.
    3. 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.
    4. Since all of the cash flows are negative, the NPV's cannot be calculated and an alternative method must be employed.
    5. 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.

    -Select-IIIIIIIVVItem 1

  2. If Kim's controller wanted to know the IRRs of the two projects, what would you tell him?

    1. 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.
    2. The IRR cannot be calculated because the cash flows are in the form of an annuity.
    3. The IRR of each project will be positive at a lower WACC.
    4. There are multiple IRR's for each project.
    5. The IRR of each project is negative and therefore not useful for decision-making.

    -Select-IIIIIIIVVItem 2

  3. If the WACC rose to 11% would this affect your recommendation?

    1. When the WACC increases to 11%, the IRR for LCC is greater than the IRR for HCC, LCC would be chosen.
    2. When the WACC increases to 11%, the IRR for HCC is greater than the IRR for LCC, HCC would be chosen.
    3. 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.
    4. When the WACC increases to 11%, the NPV of costs are now lower for LCC than HCC.
    5. When the WACC increases to 11%, the NPV of costs are now lower for HCC than LCC.

    -Select-IIIIIIIVVItem 3

    Why do you think this result occurred?

    1. The reason is that when you discount at a higher rate you are making negative CFs higher thus improving the IRR.
    2. The reason is that when you discount at a higher rate you are making negative CFs higher thus improving the NPV.
    3. The reason is that when you discount at a higher rate you are making negative CFs higher and this lowers the NPV.
    4. The reason is that when you discount at a higher rate you are making negative CFs smaller and this lowers the NPV.
    5. The reason is that when you discount at a higher rate you are making negative CFs smaller thus improving the NPV.

    -Select-IIIIIIIVV

Homework Answers

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
CHOOSING MANDATORY PROJECTS ON THE BASIS OF LEAST COST Kim Inc. must install a new air...
CHOOSING MANDATORY PROJECTS ON THE BASIS OF LEAST COST Kim Inc. 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 cost but relatively low operating costs, while LCC has a low capital cost but higher operating costs because it...
CHOOSING MANDATORY PROJECTS ON THE BASIS OF LEAST COST Kim Inc. must install a new air...
CHOOSING MANDATORY PROJECTS ON THE BASIS OF LEAST COST Kim Inc. 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 cost but relatively low operating costs, while LCC has a low capital cost but higher operating costs because it...
CHOOSING MANDATORY PROJECTS ON THE BASIS OF LEAST COST Kim Inc. must install a new air...
CHOOSING MANDATORY PROJECTS ON THE BASIS OF LEAST COST Kim Inc. 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 cost but relatively low operating costs, while LCC has a low capital cost but higher operating costs because it...
13.  Problem 11.14 (Choosing Mandatory Projects on the Basis of Least Cost) Kim Inc. must install a...
13.  Problem 11.14 (Choosing Mandatory Projects on the Basis of Least Cost) Kim Inc. 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 cost but relatively low operating costs, while LCC has a low capital cost but higher operating costs...
An electric utility is considering a new power plant in northern Arizona. Power from the plant...
An electric utility is considering a new power plant in northern Arizona. Power from the plant would be sold in the Phoenix area, where it is badly needed. Because the firm has received a permit, the plant would be legal; but it would cause some air pollution. The company could spend an additional $40 million at Year 0 to mitigate the environmental problem, but it would not be required to do so. The plant without mitigation would require an initial...
You are considering two independent projects with the following cash flows. The required return for both...
You are considering two independent projects with the following cash flows. The required return for both projects is 10%. Given this information, which one of the following statements is correct? Year  Project A  Project B 0    -950,000  -125,000 1      330,000    55,000 2      400,000    50,000 3      450,000      50,000 You should accept project B because it has the higher IRR and reject project A You should accept project A because it has the higher NPV and you can not accept both projects You should accept...
A firm with a 14% WACC is evaluating two projects for this year's capital budget. After-tax...
A firm with a 14% WACC is evaluating two projects for this year's capital budget. After-tax cash flows, including depreciation, are as follows: 0 1 2 3 4 5 Project M -$9,000 $3,000 $3,000 $3,000 $3,000 $3,000 Project N -$27,000 $8,400 $8,400 $8,400 $8,400 $8,400 Calculate NPV for each project. Do not round intermediate calculations. Round your answers to the nearest cent. Project M:    $   Project N:    $   Calculate IRR for each project. Do not round intermediate calculations. Round your answers to...
An electric utility is considering a new power plant in northern Arizona. Power from the plant...
An electric utility is considering a new power plant in northern Arizona. Power from the plant would be sold in the Phoenix area, where it is badly needed. Because the firm has received a permit, the plant would be legal; but it would cause some air pollution. The company could spend an additional $40 million at Year 0 to mitigate the environmental problem, but it would not be required to do so. The plant without mitigation would require an initial...
APITAL BUDGETING CRITERIA: ETHICAL CONSIDERATIONS An electric utility is considering a new power plant in northern...
APITAL BUDGETING CRITERIA: ETHICAL CONSIDERATIONS An electric utility is considering a new power plant in northern Arizona. Power from the plant would be sold in the Phoenix area, where it is badly needed. Because the firm has received a permit, the plant would be legal; but it would cause some air pollution. The company could spend an additional $40 million at Year 0 to mitigate the environmental problem, but it would not be required to do so. The plant without...
CAPITAL BUDGETING CRITERIA: ETHICAL CONSIDERATIONS An electric utility is considering a new power plant in northern...
CAPITAL BUDGETING CRITERIA: ETHICAL CONSIDERATIONS An electric utility is considering a new power plant in northern Arizona. Power from the plant would be sold in the Phoenix area, where it is badly needed. Because the firm has received a permit, the plant would be legal; but it would cause some air pollution. The company could spend an additional $40 million at Year 0 to mitigate the environmental problem, but it would not be required to do so. The plant without...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT