Principles of Managerial Finance (14th Edition) (Pearson Series in Finance)
Principles of Managerial Finance (14th Edition) (Pearson Series in Finance)
14th Edition
ISBN: 9780133507690
Author: Lawrence J. Gitman, Chad J. Zutter
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 rate of return on the stock in the past few years has been 20%, and HFGC managers believe that 20% 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 involves introducing one of the firm's existing products into a new market. Cash flows from each project appear in the following table.

  1. a. Calculate the NPV, IRR, and PI for both projects.
  2. b. Rank the projects based on their NPVs, IRRs, and Pls.
  3. c. Do the rankings in part b agree or not? If not, why not?
  4. 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 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…
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 19​%, and HFGC managers believe that 19​% 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           -3,500,000                -500,000   1            2,500,000                  350,000   2            1,750,000                  375,000   3            3,000,000                  375,000   4            2,250,000…
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 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…

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Principles of Managerial Finance (14th Edition) (Pearson Series in Finance)

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