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.