Consider the following mutually exclusive pieces of equipment that perform the same task. The two...
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Accounting
Consider the following mutually exclusive pieces of equipment that perform the same task. The two alternatives available provide the following set of after-tax net cash flows:
Year
Cash Flow(A)
Cash Flow(B)
0
-$20,000
-$20,000
1
13,000
6,500
2
13,000
6,500
3
13,000
6,500
4
6,500
5
6,500
6
6,500
7
6,500
8
6,500
9
6,500
Equipment A has an expected life of three years, whereas equipment B has an expected life of nine years. Assume a required rate of return of 14 percent.
a. Calculate each equipments payback period. (2 points)
b. Calculate each equipments discounted payback period. (4 points)
c. Calculate each equipments Net Present Value (NPV). (4 points)
d. Calculate each equipments internal rate of return. (4 points)
e. How would you rank the investments based on the NPV criterion? (1 point)
f. How would you rank the investments based on the IRR criterion? (1 point)
g. The assumes the reinvestment of funds at a rate equal to the equipments
IRR. (1 point)
h. The assumes the reinvestment of funds at the firms cost of capital. (1 point)
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