Irr and npv methods to evaluate capital proposals

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Tarnutzer Construction Company must replace its front end loader. The initial cost and annual net cash flows for the two models under consideration are shown in the table. Given the heavy use of the machines, they will be completely worn out at the end of 5 years and has no salvage value. The firm's cost of capital is 12 percent.

MODEL

Heavy Duty Sure Shovel

Initial Cost

Net Cash flows (year) $10,000 $10,000

1 5,000 -4,000

2 5,000 0

3 5,000 6,600

4 5,000 6,600

5 5,000 20,000

Use both the IRR and NPV methods to evaluate these capital proposals. Which should be purchased? Explain. (Except for the initial cost, assume that all cash flows are received or paid at the end of the year.)

Reference no: EM132431373

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