Chatman Company is considering two capital investments. Both investments have an initial cost of $ 5,000,000 and total net cash inflows of $ 8,000,000 over 10 years. Chatman requires a 12% rate of return on this type of investment. Expected net cash inflows are as follows:

1. Use Excel to compute the NPV and IRR of the two plans. Which plan, if any, should the company pursue?
2. Explain the relationship between NPV and IRR. Based on this relationship and the company’s required rate of return, are your answers as expected in Requirement 1? Why or why not?
3. After further negotiating, the company can now invest with an initial cost of $ 4,500,000. Recalculate the NPV and IRR. Which plan, if any, should the company pursue?

  • CreatedJanuary 16, 2015
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