Contract Manufacturing, Inc., is considering two alternative investment proposals. The first proposal calls for a major renovation of the company’s manufacturing facility. The second involves replacing just a few obsolete pieces of equipment in the facility. The company will choose one of these two mutually exclusive proposals. The cash flows associated with each project appear below:

Year	0	1	2	3	4	5
Renovate	-$9,000,000	3,500,000	3,000,000	3,000,000	2,800,000	2,500,000
Replace	-$1,000,000	600,000	500,000	400,000	300,000	200,000

The firm discounts project cash flows at 15%.

 (A) Which project should the firm choose based on net present value? 

(B) Which project should the firm choose based on internal rate of return? 

(C) Calculate the crossover rate between the two projects and explain why NPV and IRR lead to different choices. Show all necessary computations leading to your answers.

Answer rating: 100% (QA)

Question A NPV of renovating 15 is As per the NPV technique we should always like better to renovate ... View the full answer