Reference no: EM133009783

Stephens, Inc. is considering investing in one of two machines designed to reduce costs (the projects are mutually exclusive). Machine A costs $90,000 and machine B costs $150,000. Both machines have a useful life of three years and no salvage value. Stephens, Inc. has a tax rate of 20% and uses straight-line depreciation. Machine A will result in before-tax cost savings of $40,000, 50,000 and 60,000 in years 1, 2 and 3, respectively. Machine B will result in before-tax cost savings of $80,000, 80,000 and 60,000 in years 1, 2 and 3, respectively.

Problem 1: What are the relevant cash flows for each of the machines in years 0, 1, 2 and 3?

Problem 2: What are the IRRs for each project? What are the NPVs of each project at a 5% discount rate?

Problem 3: What are the NPVs of each project at a 10% discount rate?

Problem 4: At what discount rate would be indifferent between the two projects and what is the NPV of the projects at this discount rate?