Score: 1 of 10 pts HW Score: 10%, 1 of 10 pts P10-27 (similar to) Question Help

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Score: 1 of 10 pts HW Score: 10%, 1 of 10 pts 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 25%, and HFGC managers believe that 25% 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: 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 Pl 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 think the firm should do? a. The NPV of the plant expansion project is $ 2412800.00. (Round to the nearest dollar.) The NPV of the product introduction project is S (Round to the nearest dollar.) Data Table (Click on the icon located on the top-right corner of the data table below in order to copy its contents into a spreadsheet.) Year Plant expansion $3,800,000 $2,750,000 $2,750,000 $3,000,000 $1,750,000 Product introduction $500,000 $375,000 $375,000 $300,000 $275,000 Print Done

Explanation / Answer

a calculation of the net present value of the project project expansion 1 years 1 2 3 4 2 cash flows 2750000 2750000 3000000 1750000 3 PVRF at 25 % 0.8000 0.6400 0.5120 0.4096 4 present value cash flows ( 4 * 5 ) 2200000 1760000 1536000 716800 5 total present value 6212800 6 initial cash outlay 3800000 7 net present value ( 7 - 8 ) 2412800 project introduction 1 years 1 2 3 4 2 cash flows 375000 375000 300000 275000 3 PVRF at 25 % 0.8000 0.6400 0.5120 0.4096 4 present value cash flows ( 4 * 5 ) 300000 240000 153600 112640 5 total present value 806240 6 initial cash outlay 500000 7 net present value ( 7 - 8 ) 306240 projects NPV ranking project expansion 2412800 1 project introduction 306240 2 b calculation of the internal rate of return project expansion years 0 1 2 3 4 total cash flow -3800000 2750000 2750000 3000000 1750000 internal rate of return using excel .=irr( cash flows from year 0 to 4 ) 59.83% project introduction years 0 1 2 3 4 total cash flow -500000 375000 375000 300000 275000 internal rate of return using excel .=irr( cash flows from year 0 to 4 ) 59.32% projects irr ranking project expansion 59.83% 1 project introduction 59.32% 2 c calculation of the profitability index of the projects profitability index present value of the cash inflows / initial outlay project expansion 6212800 / 3800000 1.63 project introduction 806240 / 500000 1.61 projects pi ranking project expansion 1.63 1 project introduction 1.61 2 d the firm should undertake the project expansion as the net present value , irr and pi is high

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