Question

1. 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	-$30,000	-$30,000
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.

1. Calculate each equipment’s payback period. (Rounded to two decimal places)
2. Calculate each equipment’s discounted payback period. (Rounded to 2 decimal places)
3. Calculate each equipment’s Net Present Value (NPV). (Rounded to 2 decimal places)
4. Calculate each equipment’s internal rate of return. (Rounded to 2 decimal places)
5. How would you rank the investments based on the NPV criterion?
6. How would you rank the investments based on the IRR criterion?

Answer 1

(a) Payback period of each equipment

Equipment A- 2.31 years

Equpiment B- 4.62 years

(b) Discounted Payback period of each equipment

Equipment A- 2.98 years

Equipment B- 7.93 years

(c) NPV of each equipment-

Equipment A- 181.22 $

Equipment B- 2,151.42 $

(d) IRR of each equipment-

Equipment A- 14.36%

Equipment B- 15.95%

(e) Rank based on NPV criterion-

Rank 1- Equipment B

Rank 2- Equipment A

(f) Rank based on IRR criterion-

Rank 1- Equipment B

Rank 2- Equipment A