Turbomachinery Parts, Inc., is considering two mutually exclusive equipment invest- ments that would increase its production capacity. The firm uses a 14 percent required rate of return to evaluate capital expenditure projects. The two investments have the following costs and expected cash flow streams:
|
Year
|
Investment D
|
Investment E
|
Year
|
Investment D Investment E
|
|
0
|
-$50,000
|
-$50,000
|
4
|
- $15,000
|
|
1
|
24,000
|
15,000
|
5
|
- 15,000
|
|
2
|
24,000
|
15,000
|
6
|
- 15,000
|
|
3
|
24,000
|
15,000
|
|
|
a. Calculate the net present value for Investments D and E.
b. Create a replacement chain for Investment D. Assume that the cost of replacing D remains at $50,000 and that the replacement project will generate cash inflows of $24,000 for years 4 through 6. Using these figures, recompute the net present value for Investment D.
c. Which of the two investments should be chosen, D or E? Why?
d. Use the equivalent annual annuity method to solve this problem. How does your answer compare with the one obtained in part b?