Phoenix Products Inc. requires a new machine to produce a part for a solar air conditioner. Two companies have submitted bids, and you have been assigned the task of choosing one of the machines. Cash flow analysis indicates the following: Year Machine A Machine B 0 −$1,000 −$1,000 1 0 417 2 0 417 3 0 417 4 1,938 417 If the required rate of return for Phoenix Products is 5 percent, which of the following is the most valid statement? Group of answer choices The IRRA < IRRB, therefore accept Machine B. The NPVA < NPVB, therefore accept Machine B. The IRRA > IRRB, therefore accept Machine A. The NPVA > NPVB, therefore accept Machine A. None of these.
Phoenix Products Inc. requires a new machine to produce a part for a solar air conditioner. Two companies have submitted bids, and you have been assigned the task of choosing one of the machines. Cash flow analysis indicates the following: Year Machine A Machine B 0 −$1,000 −$1,000 1 0 417 2 0 417 3 0 417 4 1,938 417 If the required rate of return for Phoenix Products is 5 percent, which of the following is the most valid statement? Group of answer choices The IRRA < IRRB, therefore accept Machine B. The NPVA < NPVB, therefore accept Machine B. The IRRA > IRRB, therefore accept Machine A. The NPVA > NPVB, therefore accept Machine A. None of these.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
Phoenix Products Inc. requires a new machine to produce a part for a solar air conditioner. Two companies have submitted bids, and you have been assigned the task of choosing one of the machines. Cash flow analysis indicates the following:
If the requiredrate of return for Phoenix Products is 5 percent, which of the following is the most valid statement?
|
Year
|
Machine A
|
Machine B
|
|
0
|
−$1,000
|
−$1,000
|
|
1
|
0
|
417
|
|
2
|
0
|
417
|
|
3
|
0
|
417
|
|
4
|
1,938
|
417
|
If the required
Group of answer choices
The IRRA < IRRB, therefore accept Machine B.
The NPVA < NPVB, therefore accept Machine B.
The IRRA > IRRB, therefore accept Machine A.
The NPVA > NPVB, therefore accept Machine A.
None of these.
Expert Solution
Introduction
Net Present Value: The current worth of an ongoing flow of payments from a business, project, or investment is determined using net present value (NPV).
You have to predict the timing and size of future cash flows in order to determine NPV, and you must choose a discount rate that is equivalent to the minimum allowable rate of return. Your cost of capital or the returns offered by substitute investments with similar risks may be reflected in the discount rate.
IRR is a method of capital budgeting technique. It is a rate by which one analyzes the profitability of a project to decide whether a project is potential or not. Internal Rate of Return(IRR) is a rate by which when future cash flows are pulled at the present value which equals to Zero.
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