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 -120,000 -120,000
1 23,000 25,000
2 23,000 25,000
3 23,000 25,000
4 32,000 25,000
5 32,000 25,000
6 32,000 25,000
7 25,000
8 25,000
9 25,000
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 7 percent.
a. Calculate each equipment’s payback period.
b. Calculate each equipment’s discounted payback period.
c. Calculate each equipment’s Net Present Value (NPV).
d. calculate each equipment’s internal rate of return.