Barney is looking into the purchase of a machine for his manufacturing company. He has narrowed his decision down to 2 options. Both investments are expected to have a useful life of 3 years, and Barney uses a required rate of return of 5%. The first option will require an initial investment of $45,000 and provide net after-tax cash flows of $21,000. The second investment will require an initial cash outlay of $62,000 but will provide net after-tax cash flows of $29,000. Both after-tax cash flows factor in the depreciation tax shield.
Calculate the NPV and IRR for both investments. Which investment appears to be the better option?

Question

Barney is looking into the purchase of a machine for his manufacturing company. He has narrowed his decision down to 2 options. Both investments are expected to have a useful life of 3 years, and Barney uses a required rate of return of 5%. The first option will require an initial investment of $45,000 and provide net after-tax cash flows of $21,000. The second investment will require an initial cash outlay of $62,000 but will provide net after-tax cash flows of $29,000. Both after-tax cash flows factor in the depreciation tax shield. 
Calculate the NPV and IRR for both investments. Which investment appears to be the better option?

Quizplus · Accepted Answer

The Answer of Barney is looking into the purchase of a machine for his manufacturing company. He has narrowed his decision down to 2 options. Both investments are expected to have a useful life of 3 years, and Barney uses a required rate of return of 5%. The first option will require an initial investment of $45,000 and provide net after-tax cash flows of $21,000. The second investment will require an initial cash outlay of $62,000 but will provide net after-tax cash flows of $29,000. Both after-tax cash flows factor in the depreciation tax shield. 
Calculate the NPV and IRR for both investments. Which investment appears to be the better option?

Barney Is Looking into the Purchase of a Machine for His