Gitman: Principl Manageri Finance_15 (15th Edition) (What's New in Finance)
15th Edition
ISBN: 9780134476315
Author: Chad J. Zutter, Scott B. Smart
Publisher: PEARSON
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Chapter 10, Problem 10.27P
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
- a. Calculate the
NPV ,IRR , and PI for both projects. - b. Rank the projects based on their NPVs, IRRs, and Pls.
- c. Do the rankings in part b agree or not? If not, why not?
- d. The firm can afford to undertake only one of these investments, and the CEO favors the product introduction because it offers a higher rate of return (i.e., a higher IRR) than the plant expansion. What do you think the firm should do? Why?
| Year | Plant expansion | Product introduction |
| 0 | –$3,500,000 | –$500,000 |
| 1 | 1,500,000 | 250,000 |
| 2 | 2,000,000 | 350,000 |
| 3 | 2,500,000 | 375,000 |
| 4 | 2,750,000 | 425,000 |
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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 22%, and HFGC managers believe that 22% 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 in the following table:
Year Plant expansion Product introduction
0 -4,000,000 -500,000
1 2,000,000 375,000
2 2,000,000 350,000
3 3,000,000 400,000
4 3,000,000…
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 22%, and HFGC managers believe that 22% 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 in the following table:
Year
Plant expansion
Product Introduction
0
−$3,300,000
−$400,000
1
$2,500,000
$300,000
2
$2,750,000
$275,000
3
$2,250,000
$350,000
4
$1,500,000
$300,000
a.…
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
21%,
and HFGC managers believe that
21%
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 PIs.
d. The firm can only afford to…
Chapter 10 Solutions
Gitman: Principl Manageri Finance_15 (15th Edition) (What's New in Finance)
Ch. 10.1 - What is the financial managers goal in selecting...Ch. 10.2 - What is the payback period? How is it calculated?Ch. 10.2 - What weaknesses are commonly associated with the...Ch. 10.3 - How is the net present value (NPV) calculated for...Ch. 10.3 - Prob. 10.5RQCh. 10.3 - Prob. 10.6RQCh. 10.4 - Prob. 10.8RQCh. 10.4 - Prob. 10.9RQCh. 10.4 - Prob. 10.10RQCh. 10.5 - How is a net present value profile used to compare...
Ch. 10.5 - Prob. 10.13RQCh. 10 - Prob. 1ORCh. 10 - All techniques with NPV profile: Mutually...Ch. 10 - Elysian Fields Inc. uses a maximum payback period...Ch. 10 - Prob. E10.1WUECh. 10 - Prob. 10.2WUECh. 10 - Prob. E10.2WUECh. 10 - Axis Corp. is considering investment in the best...Ch. 10 - Prob. E10.3WUECh. 10 - Prob. 10.4WUECh. 10 - Prob. E10.4WUECh. 10 - Cooper Electronics uses NPV profiles to visually...Ch. 10 - Prob. E10.5WUECh. 10 - Payback period The Ball Shoe Company is...Ch. 10 - Payback comparisons Nova Products has a 5-year...Ch. 10 - Prob. 10.3PCh. 10 - Long-term investment decision, payback method Bill...Ch. 10 - Prob. 10.5PCh. 10 - Prob. 10.6PCh. 10 - Prob. 10.7PCh. 10 - Prob. 10.8PCh. 10 - Prob. 10.9PCh. 10 - Prob. 10.10PCh. 10 - Prob. 10.11PCh. 10 - Prob. 10.12PCh. 10 - NPV and EVA A project costs 2,500,000 up front and...Ch. 10 - Prob. 10.14PCh. 10 - Prob. 10.15PCh. 10 - Prob. 10.16PCh. 10 - Prob. 10.17PCh. 10 - Prob. 10.18PCh. 10 - Prob. 10.19PCh. 10 - Prob. 10.20PCh. 10 - Prob. 10.21PCh. 10 - Prob. 10.22PCh. 10 - Prob. 10.23PCh. 10 - Prob. 10.24PCh. 10 - All techniques with NPV profile: Mutually...Ch. 10 - Integrative: Multiple IRRs Froogle Enterprises is...Ch. 10 - Integrative: Conflicting Rankings The High-Flying...Ch. 10 - Problems with IRR White Rock Services Inc. has an...Ch. 10 - ETHICS PROBLEM Diane Dennison is a financial...Ch. 10 - Spreadsheet Exercise The Drillago Company is...
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