Eureka Mining is considering buying a new machine. There are two choices available for the company. It
Question:
Eureka Mining is considering buying a new machine. There are two choices available for the company. It may buy either machine P or machine Q. Cash flows for these two-mutually exclusive machines are given below:
Year | Machine P | Machine Q |
0 | -25,000 | -25,000 |
1 | 13,000 | 5,500 |
2 | 12,315 | 7,500 |
3 | 6,200 | 12,000 |
4 | 4,200 | 13,000 |
The IRR of Project P is given as 20% and the IRR of Project Q is given as 16%.
Based on the IRRs given, which project do you choose?
When the discount rate is 6%, NPV of Project P is $6,757. Compute the NPV of the project Q if the discount rate is 6%. Which project would you choose?
Discuss if there is any inconsistency in the choice (using IRR and NPV) and what might be the reason for any such inconsistency.
Notes: You may solve this question by trial and error method, using a financial calculator, using a spreadsheet. You may provide your answer as text information in the response box below (or attach a word or an excel file).
Engineering Economy
ISBN: 978-0132554909
15th edition
Authors: William G. Sullivan, Elin M. Wicks, C. Patrick Koelling