Kim Inc. must install a new air conditioning unit in its mainplant. Kim must install one or the other of the units; otherwise,the highly profitable plant would have to shut down. Two units areavailable, HCC and LCC (for high and low capital costs,respectively). HCC has a high capital cost but relatively lowoperating costs, while LCC has a low capital cost but higheroperating costs because it uses more electricity. The costs of theunits are shown here. Kim's WACC is 6%.

   Year 0 Year 1 Year 2 Year 3    Year 4Year 5

HCC	-$590,000	-$45,000	-$45,000	-$45,000	-$45,000	-$45,000
LCC	-$90,000	-$180,000	-$180,000	-$180,000	-$180,000	-$180,000

1. Which unit would you recommend?
   1. Since we are examining costs, the unit chosen would be the onethat had the lower NPV of costs. Since LCC's NPV of costs is lowerthan HCC's, LCC would be chosen.
   2. Since we are examining costs, the unit chosen would be the onethat had the lower NPV of costs. Since HCC's NPV of costs is lowerthan LCC's, HCC would be chosen.
   3. Since all of the cash flows are negative, the IRR's will benegative and we do not accept any project that has a negativeIRR.
   4. Since all of the cash flows are negative, the NPV's cannot becalculated and an alternative method must be employed.
   5. Since all of the cash flows are negative, the NPV's will benegative and we do not accept any project that has a negativeNPV.
   
   -Select-
2. If Kim's controller wanted to know the IRRs of the twoprojects, what would you tell him?
   1. The IRR cannot be calculated because the cash flows are all onesign. A change of sign would be needed in order to calculate theIRR.
   2. The IRR cannot be calculated because the cash flows are in theform of an annuity.
   3. The IRR of each project will be positive at a lower WACC.
   4. There are multiple IRR's for each project.
   5. The IRR of each project is negative and therefore not usefulfor decision-making.
   
   -Select-
3. If the WACC rose to 12% would this affect your recommendation?
   1. When the WACC increases to 12%, the IRR for LCC is greater thanthe IRR for HCC, LCC would be chosen.
   2. When the WACC increases to 12%, the IRR for HCC is greater thanthe IRR for LCC, HCC would be chosen.
   3. Since all of the cash flows are negative, the NPV's will benegative and we do not accept any project that has a negativeNPV.
   4. When the WACC increases to 12%, the NPV of costs are now lowerfor LCC than HCC.
   5. When the WACC increases to 12%, the NPV of costs are now lowerfor HCC than LCC.
   
   -Select-
   Explain your answer and the reason this result occurred.
   1. The reason is that when you discount at a higher rate you aremaking negative CFs higher thus improving the IRR.
   2. The reason is that when you discount at a higher rate you aremaking negative CFs higher thus improving the NPV.
   3. The reason is that when you discount at a higher rate you aremaking negative CFs higher and this lowers the NPV.
   4. The reason is that when you discount at a higher rate you aremaking negative CFs smaller and this lowers the NPV.
   5. The reason is that when you discount at a higher rate you aremaking negative CFs smaller thus improving the NPV.