Cornerstone Exercise 14 25
NPV and IRR, Mutually Exclusive Projects
Follow the format shown in Exhibit 14B 1 and Exhibit 14B 2 as you complete the requirements below.
Hardy Inc. intends to invest in one of two competing types of computer aided manufacturing equipment: CAM X and CAM Y. Both CAM X and CAM Y models have a project life of 10 years. The purchase price of the CAM X model is $3,000,000, and it has a net annual after tax cash inflow of $750,000. The CAM Y model is more expensive, selling for $3,500,000, but it wil produce a net annual after tax cash inflow of $875,000. The cost of capital for the company is 10 percent.
1. Calculate the NPV for each project. Round present value calculations and your final answers to the nearest dollar.
CAM X: $
CAM Y: $
Which model would you recommend?
2. Calculate the IRR for each project.
CAM X:
CAM Y:
Which model would you recommend?