Alejandra works in the HR department of CAX Communications Ltd., a media giant. She plans to...

   

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Alejandra works in the HR department of CAX Communications Ltd., a media giant. She plans to implement a new Human Resource Management (HRM) system that she believes will improve the functionality of the current system and will be profitable for the firm in the end. She estimates that the installation of the system will require a cash outflow (in other words a negative cash flow) of $300,000 at the start (1-0). The system will produce a cash inflow of $100,000 and $90,000 in years 1 (t-1) and 2 (t=2) respectively. However, the system will have to be shut down and has to be integrated with the existing companywide enterprise system in year 3. The integration will require a cash outflow (negative cash flow) of $31,000 in year 3 (t-3). The new HRM system will be up and running after that and will produce a cash inflow of $98,000 and $112,000 in years 4 (1-4) and 5 (1-5) respectively. She estimates that the cost of capital for firm is 6.8%. She approaches Anthony, CFO of CAX Communications, to get an approval for the project. Anthony calculates the payback period and argues that the payback period is more than the critical value of 3 years and hence, the project should be rejected. What value of payback period did Anthony calculate for the project? Alejandra argues that the payback period criteria is flawed and should never be used. She rather insists that the IRR of the project is the better metric. She calculates the IRR of the project and argues that the IRR is greater than the cost of capital and hence, the project should be accepted. Do you agree with her that that the payback period criteria is flawed? What value of IRR did Alejandra calculate for the project? a. Yes, payback period is flawed. IRR for the project is 7.169%. b. No payback period is not flawed and it is an acceptable criterion for project selection. IRR for the project is 7.169%. a. Yes. payback period is flawed. However, she is wrong about project selection since, the IRR for the project is 6.16%, which is less than the cost of capital. b. No payback period is not flawed. However, she is wrong about project selection since, the IRR for the project is 6.16%, which is less than the cost of capital. c. Alejandra is bluffing too; IRR is indeterminate for this cash flow structure. Since they cannot agree with each other, they decided to approach Diego, CEO of CAX Communications, recently hired from FAX media and an industry veteran of 20 years. After listening to both of them and their arguments, Diego smiles since, he knows that they both are not entirely correct. Diego paid more attention to the FI 3300 course and remembers that NPV is a far superior project selection criteria. He starts with calculating the NPV of the project. What value of NPV did Diego calculate for the project? Will he accept the project? a. NPV = $2,198.87. He will accept the project since the NPV is greater than zero. b. NPV = $5,189.16. He will not accept the project since the NPV is less than zero. c. NPV = $3,019.76. He will accept the project since the NPV is greater than zero. d. NPV = -$997.19. He will not accept the project since the NPV is greater than zero. e. NPV is indeterminate for this cash flow structure. This is a classical management problem where no one in the upper management knows what they are doing. Alejandra works in the HR department of CAX Communications Ltd., a media giant. She plans to implement a new Human Resource Management (HRM) system that she believes will improve the functionality of the current system and will be profitable for the firm in the end. She estimates that the installation of the system will require a cash outflow (in other words a negative cash flow) of $300,000 at the start (1-0). The system will produce a cash inflow of $100,000 and $90,000 in years 1 (t-1) and 2 (t=2) respectively. However, the system will have to be shut down and has to be integrated with the existing companywide enterprise system in year 3. The integration will require a cash outflow (negative cash flow) of $31,000 in year 3 (t-3). The new HRM system will be up and running after that and will produce a cash inflow of $98,000 and $112,000 in years 4 (1-4) and 5 (1-5) respectively. She estimates that the cost of capital for firm is 6.8%. She approaches Anthony, CFO of CAX Communications, to get an approval for the project. Anthony calculates the payback period and argues that the payback period is more than the critical value of 3 years and hence, the project should be rejected. What value of payback period did Anthony calculate for the project? Alejandra argues that the payback period criteria is flawed and should never be used. She rather insists that the IRR of the project is the better metric. She calculates the IRR of the project and argues that the IRR is greater than the cost of capital and hence, the project should be accepted. Do you agree with her that that the payback period criteria is flawed? What value of IRR did Alejandra calculate for the project? a. Yes, payback period is flawed. IRR for the project is 7.169%. b. No payback period is not flawed and it is an acceptable criterion for project selection. IRR for the project is 7.169%. a. Yes. payback period is flawed. However, she is wrong about project selection since, the IRR for the project is 6.16%, which is less than the cost of capital. b. No payback period is not flawed. However, she is wrong about project selection since, the IRR for the project is 6.16%, which is less than the cost of capital. c. Alejandra is bluffing too; IRR is indeterminate for this cash flow structure. Since they cannot agree with each other, they decided to approach Diego, CEO of CAX Communications, recently hired from FAX media and an industry veteran of 20 years. After listening to both of them and their arguments, Diego smiles since, he knows that they both are not entirely correct. Diego paid more attention to the FI 3300 course and remembers that NPV is a far superior project selection criteria. He starts with calculating the NPV of the project. What value of NPV did Diego calculate for the project? Will he accept the project? a. NPV = $2,198.87. He will accept the project since the NPV is greater than zero. b. NPV = $5,189.16. He will not accept the project since the NPV is less than zero. c. NPV = $3,019.76. He will accept the project since the NPV is greater than zero. d. NPV = -$997.19. He will not accept the project since the NPV is greater than zero. e. NPV is indeterminate for this cash flow structure. This is a classical management problem where no one in the upper management knows what they are doing.

Answer rating: 100% (QA)

1 Anthonys Calculation Anthony calculates the payback period and concludes that its more than the critical value of 3 years so he argues to reject the ... View the full answer