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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 Equip A Cash Flows Year2 Yearl Year3 Year4 Cost of equipment Shipping & handling Start- up expenses Total Investment (100,000) $(5,000) $(15,000) $ (120,000) Labor savings (after tax) Salvage value (after tax) Total Savings $15,000 $40,000 50,000 $50,000 5,000 $15,000 $40,000 50,000 $55,000 WACC 9% NPV IRR Payback Equip B Cash Flows Year2 Yearl Year3 Year4 Cost of equipment Shipping & handling Start - up expenses Total Investment (120,000) $(5,000) $(5,000) $(130,000) Labor savings (after tax) Salvage value (after tax) Total Savings S30,000 $40,000 50,000 $50,000 5,000 S30,000 $40,000 50,000 $55,000 WACC 9% NPV IRR Payback 1) Explain what NPV means to your CEO 2) Should you invest in this project? Why? 3) What are the two major drawbacks to using IRR? 4) Explain why Payback sucks as a value metric The NPV is the present value of all FCF's or more simply put it is the value a project adds to the company s, because the NPV is positive. ider risk or the size of investment