Better Health Pty. Ltd. is evaluating whether to buy pieces of medical equipment each of which requires an up-front expenditure of $1.5 million. The projects are expected to produce the following net cash inflows:
Year Equipment A Equipment B
1 $500,000 $2,000,000
2 $1,000,000 $1,000,000
3 $2,000,000 $600,000
a. What is the internal rate of return for each piece of equipment?
b. What is the payback period for each machine?
c. What is the net present value of each machine if the cost of capital is 10 per cent? 5 per cent? 15 per cent?
d. Should Better Health buy both machines, only one, or none? Explain your answer.