NPV / IRR Problems Mauser Company is trying to reduce its cost structure in an effort to boost profits. It is looking at automating parts of its production process. It is evaluating two different pieces of equipment to accomplish the cost reductions. Below are the free cash flow estimates associated with the two projects. WACC 9% Equip A Year 1 Cash Flows Year 2 Today Year 3 Year 4 $ $ Cost of equipment Shipping & handling Start-up expenses Total Investment (100,000) (5,000) (15,000) (120,000) $ 35,000 Labor savings (after tax) Salvage value after tax) Total Savings $ $ $ 15,000 $ $ 15,000 $ 50,000 $ $ 50,000 $ 60,000 5,000 65,000 35,000 $ NPV IRR Payback MIRR PI Equip B Year 1 Cash Flows Year 2 WACC 9% Today Year 3 Year 4 Cost of equipment Shipping & handling Start-up expenses Total Investment $ $ $ $ (120,000) (5,000) (5,000) (130,000) 30,000 $ 40,000 $ 50,000 Labor savings (after tax) Salvage value (after tax) Total Savings $ $ 50,000 10,000 60,000 $ 30,000 $ 40,000 $ 50,000 $ NPV IRR Payback MIRR PI 1) Explain in simple business terms what NPV means to your CEO. 2) What are the two major drawbacks to using IRR? NPV IRR Payback MIRR PI 1) Explain in simple business terms what NPV means to your CEO. 2) What are the two major drawbacks to using IRR? 3) What is the difference between IRR and MIRR? 4) Explain what the Profitability Index is and how it should be used. 5) Explain why Payback sucks as a value metric. 6) How would the type of financing impact NPV