Aqua Tech Testing is considering investing in a new testing device. It has two options: Option A

Question:

Aqua Tech Testing is considering investing in a new testing device. It has two options: Option A would have an initial lower cost but would require a significant expenditure for rebuilding after 5 years. Option B would require no rebuilding expenditure, but its maintenance costs would be higher. Since the option B machine is of initial higher quality, it is expected to have a salvage value at the end of its useful life. The following estimates were provided. The company’s cost of capital is 9%.

Option A Option B Initial cost Net annual cash flows Cost to rebuild (end of year 5) Salvage value Estimated useful life

Instructions

(a) Compute the

(1) Net present value, and

(2) Internal rate of return for each option.

(b) Which option should be accepted?

Net Present Value
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Internal Rate of Return of IRR is a capital budgeting tool that is used to assess the viability of an investment opportunity. IRR is the true rate of return that a project is capable of generating. It is a metric that tells you about the investment... Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of...