1. Mesa Products Inc. requires a new machine to produce a part for a solar air conditioner. Two companies have submitted bids, and you have been assigned the task of choosing one of the machines. Cash flow analysis indicates the following:
Year Machine A Machine B
0 -1,000 -1,000
1 0 417
2 0 417
3 0 417
4 1,938 417
If the cost of capital for Mesa is 5%, which one of the following statements is the most valid?
a. Project B because of higher NPV
b. Project A because of higher NPV
c. Project A because of higher IRR
d. Project B because of higher IRR
e. Neither, because both projects have IRRs less than the cost of capital
Solution contains calculations of NPV and IRR.