2024 – Module 5 Week 10 11 Your company has a cost of capital

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Module 5——Week 10, 11

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.           Your company has a cost of capital equal to 10%.  If the following projects are mutually exclusive, and you only have the information that is provided, which should you accept?

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	A	B	> C	E
Payback (years)	1	>3 3	2	5
IRR	>16% 16%	18%	20%	15%
>npv NPV (Millions)	$20	$55	$25	$80

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a.         A

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b.         B

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c.         C

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d.         B and C

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e.             E

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2. Hagar Industrial Systems Company (HISC) is trying to decide between two different conveyor belt systems. System A costs $290,000, has a four-year life, and requires $85,000 in pretax annual operating costs. System B costs $405,000, has a six-year life, and requires $75,000 in pretax annual operating costs.

Both systems are to be depreciated straight-line to zero over their lives and will have zero salvage value. Whichever system is chosen, it will not be replaced when it wears out. The tax rate is 34 percent and the discount rate is 11 percent.

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Calculate the NPV for both conveyor belt systems.

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