3) The Withit Corporation is considering two alternatives for automating their machine-parts operation. Alternative 1 requires an initial investment of $70,000 and decreasing yearly O&M costs as shown in the table below. It has a five-year life span. Alternative 2 requires an initial investment of $90,000 and has annual yearly costs of $500 over a ten-year life span. Both machines have zero salvage value. Assume an interest rate of 10%.
Calculate the NPV and IRR for each alternative. How would you compare the two?
|
Year
|
Alternative 1
|
Alternative 2
|
|
0
|
-$70
|
-$90
|
|
1
|
-10
|
-0.5
|
|
2
|
-8
|
-0.5
|
|
3
|
-6
|
-0.5
|
|
4
|
-4
|
-0.5
|
|
5
|
-2
|
-0.5
|
|
6
|
|
-0.5
|
|
7
|
|
-0.5
|
|
8
|
|
-0.5
|
|
9
|
|
-0.5
|
|
10
|
|
-0.5
|
(All values in $1,000)