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 7%. HCC LCC 0 1 + -$600,000 -$90,000 -$50,000 -$175,000 2 3 4 5 + + -$50,000 -$50,000 -$50,000 -$175,000 -$175,000 -$175,000 -$175,000 -$50,000 a. Which unit would you recommend? 1. Since all of the cash flows are negative, the NPV's cannot be calculated and an alternative method must be employed. II. 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. III. 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. -Select- IV. 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. V. 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. b. If Kim's controller wanted to know the IRRS of the two projects, what would you tell him? I. The IRR cannot be calculated because the cash flows are in the form of an annuity. II. The IRR of each project will be positive at a lower WACC. III. There are multiple IRR's for each project. -Select- IV. The IRR of each project is negative and therefore not useful for decision-making. V. 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. c. If the WACC rose to 14% would this affect your recommendation? I. When the WACC increases to 14%, the NPV of costs are now lower for LCC than HCC. II. When the WACC increases to 14%, the NPV of costs are now lower for HCC than LCC. III. When the WACC Increases to 14%, the IRR for LCC is greater than the IRR for HCC, LCC would be chosen. -Select- IV. When the WACC Increases to 14%, the IRR for HCC is greater than the IRR for LCC, HCC would be chosen. V. 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. Why do you think this result occurred? 1. The reason is that when you discount at a higher rate you are making negative CFs smaller and this lowers the NPV. II. The reason is that when you discount at a higher rate you are making negative CFS smaller thus improving the NPV. III. The reason is that when you discount at a higher rate you are making negative CFs higher thus improving the IRR. IV. The reason is that when you discount at a higher rate you are making negative CFs higher thus improving the NPV. V. The reason is that when you discount at a higher rate you are making negative CFs higher and this lowers the NPV. -Select- v

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Middle Industries produces a sensor for use in manufacturing. It produces the sensor in a plant with an annual practical capacity of 75,000 units. The variable cost of the sensor is $185.00 per unit, and the fixed costs of the plant are $12,375,000 annually. Current annual demand is 55,000 sensors. Middle Industries bought the plant because it was close to its other manufacturing facilities and was available for sale when they were searching for a location. Required: What cost per sensor should the cost system report to facilitate management decision making? What is the cost of excess capacity? What cost per sensor would the cost system report if the smallest manufacturing plant that could be built was able to produce 75,000 sensors? What would be the cost of excess capacity?

Trader Bubba Industries must choose between solar and an electric-powered forklift truck for moving materials in its factory. Because both forklifts perform the same function, the firm will choose only one. (They are mutually exclusive investments.) The solar truck will cost more but will be less expensive to operate; it will cost $70,000, whereas the electric-powered truck will cost $60,000. The life for both types of truck is estimated to be 8 years, during which time the net cash flows for the solar-powered truck will be $20,000 per year and those for the electric-powered truck will be $12,000 per year. Trader Bubba Industries’ assets are $400 million, financed through bank loans, bonds, preferred stocks, and common stocks. The amounts are as follows: Bank loans: $50 million borrowed at 6% Bonds: $200 million, paying 8% coupon with semi-annual payments, and maturity of 10 years. Trader Bubba sold its $1,000 par-value bonds for $1020 and had to incur $20 flotation cost per bond.…

AMD is contemplating a decision to either continue producing a unique line of microprocessors, or discontinue production. • The AMD factory manufactures approximately 100,000 of such processors and generates $3,000,000 in revenues and incurs $2,000,000 in variable costs. • AMD estimates that if the product is discontinued ADM would save $ 1,500,000 in fixed manufacturing costs in engineering support and depreciation costs of production equipment. • Should AMD keep or discontinue production of this product line?

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 6%. 1 2 3 4 НСС -$600,000 -$45,000 -$45,000 -$45,000 -$45,000 -$45,000 LCC -$90,000 -$175,000 -$175,000 -$175,000 -$175,000 -$175,000 a. Which unit would you recommend? I. 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. II. Since all of the cash flows are negative, the NPV's cannot be calculated and an alternative method must be employed. III. Since all of the cash flows are negative, the NPV's will be negative and we do not accept any…

Bermuda Co. must choose between gas-powered and an electric-powered forklift truck for moving materials in its factory.  Because both forklifts perform the same function, the firm will choose only one. (They are mutually exclusive investments.)  The electric-powered truck will cost more, but it will be less expensive to operate; it will cost $110,000, whereas the gas powered truck will cost $40,000.  The required rate of return that applies to both investments is 14 percent.  The life for both types of truck is estimated be 12 years, during which time the net cash flows for the electric-powered truck will be $23,500 per year and those for gas-powered truck will be $10,000 per year.  Calculate the NPV and IRR for each type of truck, and decide which to recommend.

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Cox Electric makes electronic components and has estimated the following for a new design of one of its products. Fixed cost = $12,350 • Material cost per unit = $0.16 •Labor cost per unit = $0.12 •Revenue per unit = $0.66 Note that fixed cost is incurred regardless of the amount produced. Per-unit material and labor cost together make up the variable cost per unit. Assuming that Cox Electric sells all that it produces, profit is calculated by subtracting the fixed cost and total variable cost from total revenue. Construct an appropriate spreadsheet model to find the profit based on a given production level and use the spreadsheet model to answer these questions. (a) Construct a one-way data table with production volume as the column input and profit as the output. Breakeven occurs when profit goes from a negative to a positive value; that is, breakeven is when total revenue = the total cost, yielding a profit of zero. Vary production volume from 0 to 100,000 in increments of 10,000.…

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