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Rico Company has been growing very rapidly in recent years, making it shareholders rich in the… 1 answer below » Rico Company has been growing very rapidly in recent years, making it shareholders rich in the process. The average annual rate of return on the stock in the last few years has been 20% and the last few years has been 20%, and Rico managers believe that 20% is a reasonable figure for the firms cost of capital. To sustain a high growth rate, the Rico CEO argues that the company must continue to invest in projects that offer the highest possible rate of return. Two projects are currently under review. The first is an expansion of the firms production capacity, and the second project involves View complete question » Rico Company has been growing very rapidly in recent years, making it shareholders rich in the process. The average annual rate of return on the stock in the last few years has been 20% and the last few years has been 20%, and Rico managers believe that 20% is a reasonable figure for the firms cost of capital. To sustain a high growth rate, the Rico CEO argues that the company must continue to invest in projects that offer the highest possible rate of return. Two projects are currently under review. The first is an expansion of the firms production capacity, and the second project involves introducing one of the firms existing products into a new market. cash flows from each project appear in the table. A. Calculate the NPV, IRR, and PI B.Rank the projects based on NPV IRR and PI. C.Do the rankings in part B agree or not? If not, why not? D.The firm can only afford to undertake one of these investments , and the CEO favors the product introduction because it offers a higher rate of return ( that is, a higher IRR) than the plant expansion. What do you think the firm should do? Why? Year Plant Expansion Plant 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 View less » Sep 05 2015 11:14 AM
