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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 IRR, and recommended the highest IRR option, Proposal A You are concerned and decide 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 was 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 (in $ millions): Year 0 Year 1 Year 2 Proposal A IRR 60.0% 54.3% 53.6% -$100 $30 $0 $37 $153 $206 $0 Year 3 $88 $95 $204+? -$100 Suppose the appropriate cost of capital for each alternative is 10%. Using this information, determine the NPV of each proposal. Which project should the firm choose? Why is ranking the projects by their IRR not valid in this situation?

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 IRR, and recommended the highest IRR option, Proposal A You are concerned and decide 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 was 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 (in $ millions): Year 0 Year 1 Year 2 Proposal A IRR 60.0% 54.3% 53.6% -$100 $30 $0 $37 $153 $206 $0 Year 3 $88 $95 $204+? -$100 Suppose the appropriate cost of capital for each alternative is 10%. Using this information, determine the NPV of each proposal. Which project should the firm choose? Why is ranking the projects by their IRR not valid in this situation?

Essentials of Business Analytics (MindTap Course List)
Essentials of Business Analytics (MindTap Course List)
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
Chapter6: Statistical Inference
Section: Chapter Questions
Problem 26P: Because of high production-changeover time and costs, a director of manufacturing must convince...
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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 IRR, and recommended the highest IRR option, Proposal A. You are concerned and decide 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 was 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 (in $ millions): Proposal Year 1 Year 2 с IRR 60.0% 54.3% 53.6% Year 0 - $100 $30 $0 $37 $153 $206 $0 Year 3 $88 $95 $204+? -$100 Suppose the appropriate cost of capital for each alternative is 10%. Using this information, determine the NPV of each proposal. Which project should the firm choose? Why is ranking the proiects by their IRR not valid in this situation? min
Transcribed Image Text: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 IRR, and recommended the highest IRR option, Proposal A. You are concerned and decide 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 was 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 (in $ millions): Proposal Year 1 Year 2 с IRR 60.0% 54.3% 53.6% Year 0 - $100 $30 $0 $37 $153 $206 $0 Year 3 $88 $95 $204+? -$100 Suppose the appropriate cost of capital for each alternative is 10%. Using this information, determine the NPV of each proposal. Which project should the firm choose? Why is ranking the proiects by their IRR not valid in this situation? min
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