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(10) Points The Big Company is considering two pieces of machinery that perform the same...

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Finance

(10) Points The Big Company is considering two pieces of machinery that perform the same repetitive task. The two alternatives available provide the following set of after-tax net cash flows. Assuming a required rate of return of 10%:

Year

Project A

Project B

0

(40,000)

(75,000)

1

20000

22000

2

20000

22000

3

20000

22000

4

22000

5

22000

6

22000

For the above projects find the cross-over point, i.e. the discount rate where NPVs are equal. Draw a rough draft of the two NPV profiles. Hint: figure out the NPV at a zero discount rate. At a discount rate of 12%, which project(s) would you select? At a discount rate of 20%, which project(s) would you select?

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