Integrative Conflicting Rankings 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 23%, and HFGC managers believe that 23% is a reasonable figure for the firm's cost of capital. To sustain a high growth ra 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 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 PI 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? - X 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 Plant expansion - $3,200,000 $1,750,000 $1,750,000 $1,500,000 Product introduction - $400,000 $325,000 $325,000 $400,000
Integrative Conflicting Rankings 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 23%, and HFGC managers believe that 23% is a reasonable figure for the firm's cost of capital. To sustain a high growth ra 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 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 PI 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? - X 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 Plant expansion - $3,200,000 $1,750,000 $1,750,000 $1,500,000 Product introduction - $400,000 $325,000 $325,000 $400,000
Chapter15: Dividend Policy
Section: Chapter Questions
Problem 10P
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Transcribed Image Text:Integrative-Conflicting Rankings 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 23%, and HFGC managers believe that 23% 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 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 PI 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?
X
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
- $3,200,000
$1,750,000
$1,750,000
$1,500,000
$2,500,000
Product introduction
- $400,000
$325,000
$325,000
$400,000
$250,000
-
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