You have just started your summer internship, and your boss asks you to review a recent analysis that was done to compare three alternative proposals to enhance the firm's manufacturing facility. You find that the prior analysis ranked the proposals according to their IRRs and recommended the highest IRR option, Proposal A. You are concerned and decided to redo the analysis using NPV to determine whether this recommendation was appropriate. But while you are confident the IRRS were computed correctly, it seems that some of the underlying data regarding the cash flows that were estimated for each proposal were not included in the report. For Proposal B, you cannot find information regarding the total initial investment that was required in year 0. And for Proposal C, you cannot find the data regarding additional salvage value that will be recovered in year 3. Here is the information you have: Proposal IRR Year 0 Year 1 Year 2 Year 3 A 60.0% -100 30 153 88 B 55.0% ? 0 206 95 C 50.0% -100 37 0 204 ? Suppose the appropriate cost of capital for each alternative is 10%. (a) Using this information, determine the NPV of each project. Based on your calculation, which project should the firm choose? (b) Why is ranking the projects by their IRRS not valid in this situation? Briefly explain your answers.

2nd Edition

ISBN:9781305627734

Author:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. Anderson

Publisher:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. Anderson

Chapter5: Probability: An Introduction To Modeling Uncertainty

Section: Chapter Questions

Problem 7P: The Human Resources Manager for Optilytics LLC is evaluating applications for the position of Senior...