Integrative long dash— Conflicting Rankings??? The? High-Flying Growth Company?
ID: 1170281 • Letter: I
Question
Integrativelong dash—Conflicting
Rankings???The? High-Flying Growth Company? (HFGC) has been growing very rapidly in recent? years, making its shareholders rich in the process. The average annual rate of return on the stock in the last few years has been 19?%, and HFGC managers believe that 19?% is a reasonable figure for the? firm's cost of capital. To sustain a high growth? rate, the HFGC 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 project 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
Product introduction
0
??$3,800,000
??$500,000
1
?$1,500,000
?$375,000
2
?$2,750,000
?$300,000
3
?$3,000,000
?$350,000
4
?$2,000,000
?$400,000
Year
Plant expansion
Product introduction
0
??$3,800,000
??$500,000
1
?$1,500,000
?$375,000
2
?$2,750,000
?$300,000
3
?$3,000,000
?$350,000
4
?$2,000,000
?$400,000
Explanation / Answer
For plant expansion proposal
Statement Showing NPV
PI = PV of cash inflow/PV of cash outflow
=5980042/3800000
=1.547
For production itroduction proposal
Statement Showing NPV
PI =934139/500000
=1.87
Thus project indroduction should be done as it provide more return than plant expansion. If considering firm's value then plant expansion should be done as NPV is more than project indroduction
Year Cash flow PVIF @ 19% Present Value 0 -3800000 1.0000 -3800000 1 1500000 0.8403 1260504 2 2750000 0.7062 1941953 3 3000000 0.5934 1780247 4 2000000 0.4987 997338 NPV 2180042Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.