Reference no: EM131352312
We have the following information:
You work for a non-profit company (don’t pay contributions). The Finance Chief has asked you to evaluate two similar machines.
Machine A requires an initial investment of $ 5,000, has a 10 year life expectancy, and is expected to reduce the company's operating costs by $ 1,200. annually in "real terms". This machine would have no sales value at the end of its useful life.
Machine B requires an initial investment of $ 9,000, has a 15-year shelf life, and is expected to reduce the company's operating costs by $ 1,500. annually in "real terms". This machine could be sold for $ 1,000. in "real terms" at the end of its useful life.
The required return in "nominal terms" is 13.30% and expected inflation is 3%. Which of the two machines would you recommend if:
A) They will not be replaced at maturity
B) They will be replaced at maturity indefinitely.
C) They will be used and replaced as necessary for a period of 35 years.
D) Calculate the IRR for each of the machines.
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