Turbomachinery Parts, Inc., is considering two mutually exclusive equipment investments that would increase its production capacity. The

Question:

Turbomachinery Parts, Inc., is considering two mutually exclusive equipment investments that would increase its production capacity. The firm uses a 14 percent required rate of return to evaluate capital expenditure projects. The two investments have the following costs and expected cash flow streams:

a. Calculate the net present value for Investments D and E.
b. Create a replacement chain for Investment D. Assume that the cost of replacing D remains at $50,000 and that the replacement project will generate cash inflows of $24,000 for years 4 through 6. Using these figures, recompute the net present value for Investment D.
c. Which of the two investments should be chosen, D or E? Why?
d. Use the equivalent annual annuity method to solve this problem. How does your answer compare with the one obtained in partb?

Net Present Value
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