2D2G DIANE HARPER, VICE PRESIDENT OF FINANCE FOR BGN INDUSTRIES, IS R...
332.
CSO: 2D2b
LOS: 2D2g
Diane Harper, Vice President of Finance for BGN Industries, is reviewing material
prepared by her staff prior to the board of directors meeting at which she must
recommend one of four mutually exclusive options for a new product line. The summary
information below indicates the initial investment required, the present value of cash
inflows (excluding the initial investment) at BGN’s hurdle rate of 16%, and the internal
rate of return (IRR) for each of the four options.
Present Value of
Option
Investment
Cash Inflows at 16%
IRR
X
$3,950,000
$3,800,000
15.5%
Y
3,000,000
3,750,000
19.0%
Z
2,000,000
2,825,000
17.5%
W
800,000
1,100,000
18.0%
If there are no capital rationing constraints, which option should Harper recommend?
a.
Option X.
b.
Option Y.
c.
Option Z.
d.
Option W.