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We have the following information:

You work for a non-profit company (don’t pay contributions). The Finance Chief has asked you to evaluate two similar machines.

Machine A requires an initial investment of $ 5,000, has a 10 year life expectancy, and is expected to reduce the company's operating costs by $ 1,200. annually in "real terms". This machine would have no sales value at the end of its useful life.

Machine B requires an initial investment of $ 9,000, has a 15-year shelf life, and is expected to reduce the company's operating costs by $ 1,500. annually in "real terms". This machine could be sold for $ 1,000. in "real terms" at the end of its useful life.

The required return in "nominal terms" is 13.30% and expected inflation is 3%. Which of the two machines would you recommend if:

A) They will not be replaced at maturity

B) They will be replaced at maturity indefinitely.

C) They will be used and replaced as necessary for a period of 35 years.

D) Calculate the IRR for each of the machines.

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M92165197

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