The Cosmo K Manufacturing Group is considering the addition of a new smelting machine or a new paving machine. The two investments are mutually exclusive; if one is selected, the other is rejected. The annual cash flows after taxes and the effects of depreciation, which begin one year from project start, and their respective probabilities are given below: Smelting Machine Paving Machine Probability Net Cash Flows per Year Probability Net Cash Flows per Year 0.2 $14,100.00 0.2 $2,000.00 0.5 $16,000.00 0.5 $16,000.00 0.2 $17,000.00 0.2 $22,000.00 0.1 $20,000.00 0.1 $33,000.00 Each project has an expected life of 4 years and will cost $45,000. The riskier project will be evaluated at the company's WACC plus 3%, and the less risky project will be evaluated at the company's WACC. Cosmo K has the following capital structure: Debt: 30% Preferred stock: 16% Common stock: 54%
What is the coefficient of variation for each investment?
Given the data above, which investment has the higher risk?
What is the expected net present value (NPV) for each investment?
What is the internal rate of return (IRR) of the investments?
According to the decision rules for the NPV and those for the IRR, is there an acceptable project? Explain your answer.
Is there a conflict between the two decision methods? If so, what would you use to recommend a project?