P10-27 (similar to) Question Help * Integrative Conflicting Rankings The High-Fl
ID: 2790073 • Letter: P
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P10-27 (similar to) Question Help * Integrative 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 mis 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 possibile. 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: a. Calculate the NPV for both projects. Rank the projects based on their NPVs. b. Calculate the IRR for both projects. Rank the projects based on their IRRs. c. Calculate the PI for both projects. Rank the projects based on their Pls. d. The firm can only afford to undertake one of these investments. What do you thin a. The NPV of the plant expansion project is (Round to the nearest dollar.) (Click on the icon located on the top-right comer of the data table below in or copy its contents into a spreadsheet) Plant expansion -$2,900,000 $3,000,000 $1,750,000 $1,500,000 $2,000,000 Product introduction $400,000 $400,000 $300,000 $350,000 $250,000 Year Enter your answer in the answer box and then click Check Answer partsExplanation / Answer
a. NPV:
Plant expansion:
Product introduction:
based on NPV, plant expansion is suggested
b. IRR: Trail and error method:
Plant expansion IRR is: 70.53%
Product introduction IRR is: 79.64%
Based on IRR Product introduction is suggested.
c. PI:
Plant expansion:
Product introduction:
based on PI product introduction is suggested.
d. If firm can afford plant expansion it is preferred over product introduction as it is yielding more revenue in numbers than the product introduction.
Year 0 Year 1 Year 2 Year 3 Year 4 Initial investment (2,900,000) Annual cash flows 3,000,000 1,750,000 1,500,000 2,000,000 Net cash flow (2,900,000) 3,000,000 1,750,000 1,500,000 2,000,000 Discount rate@ 19.00% 1.0000 0.8403 0.7062 0.5934 0.4987 Discounted cash flow (2,900,000.00) 2,521,008.40 1,235,788.43 890,123.72 997,337.50 NPV 2,744,258.06Related Questions
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