The High-Flying Growth Company (HFGC) has been expanding very rapidly in recent years, making its shareholders...

 

Transcribed Image Text:

The High-Flying Growth Company (HFGC) has been expanding very rapidly in recent years, making its shareholders rich in the process. The average annual rate of return on the stock in the past 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, HFGC's 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 products into a new market. Cash flows from each project appear 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 undertake only one investment. What do you think the firm should do? Data table (Click on the icon here in order to copy the contents of the data table below into a spreadsheet.) Year 0 1 2 3 4 Plant expansion - $4,400,000 $2,500,000 $2,750,000 $2,250,000 $3,000,000 Product introduction - $500,000 $325,000 $350,000 $325,000 $325,000 The High-Flying Growth Company (HFGC) has been expanding very rapidly in recent years, making its shareholders rich in the process. The average annual rate of return on the stock in the past 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, HFGC's 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 products into a new market. Cash flows from each project appear 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 undertake only one investment. What do you think the firm should do? Data table (Click on the icon here in order to copy the contents of the data table below into a spreadsheet.) Year 0 1 2 3 4 Plant expansion - $4,400,000 $2,500,000 $2,750,000 $2,250,000 $3,000,000 Product introduction - $500,000 $325,000 $350,000 $325,000 $325,000 The High-Flying Growth Company (HFGC) has been expanding very rapidly in recent years, making its shareholders rich in the process. The average annual rate of return on the stock in the past 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, HFGC's 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 products into a new market. Cash flows from each project appear 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 undertake only one investment. What do you think the firm should do? Data table (Click on the icon here in order to copy the contents of the data table below into a spreadsheet.) Year 0 1 2 3 4 Plant expansion - $4,400,000 $2,500,000 $2,750,000 $2,250,000 $3,000,000 Product introduction - $500,000 $325,000 $350,000 $325,000 $325,000 The High-Flying Growth Company (HFGC) has been expanding very rapidly in recent years, making its shareholders rich in the process. The average annual rate of return on the stock in the past 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, HFGC's 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 products into a new market. Cash flows from each project appear 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 undertake only one investment. What do you think the firm should do? Data table (Click on the icon here in order to copy the contents of the data table below into a spreadsheet.) Year 0 1 2 3 4 Plant expansion - $4,400,000 $2,500,000 $2,750,000 $2,250,000 $3,000,000 Product introduction - $500,000 $325,000 $350,000 $325,000 $325,000

Answer rating: 100% (QA)

ANSWER To calculate the NPV IRR and PI for both projects we need to discount the cash flows using the firms cost of capital which is 25 Project 1 Plant Expansion Year 0 4400000 Year 1 2500000 Year 2 2... View the full answer