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NPV & IRR

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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

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Solution Summary

The solution contains calculations of NPV and IRR. A cash flow analysis is provided for Mesa Products.

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HOMEWORK PRACTICE PROBLEM

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 ...

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