The CTO of a pharmaceutical firm will install one of two mechanical devices to reduce costs. Both devices have useful lives of 5 years and no salvage value. Device A cost: $10,000 - Expected to result in $3,000 savings annually. Device B cost: $13,285 - Expected to result in savings of $3,000 the first year, and then savings will increase $500 annually. [Year 2 savings will be $3,500, Year 3 savings will be $4,000 and so on] Interest at 7%, which device should the firm purchase? 1. Use IRR and show the sequence of alternatives being assessed 2. Use ERR and show the sequence of alternatives being assessed
The CTO of a pharmaceutical firm will install one of two mechanical devices to reduce costs. Both devices have useful lives of 5 years and no salvage value. Device A cost: $10,000 - Expected to result in $3,000 savings annually. Device B cost: $13,285 - Expected to result in savings of $3,000 the first year, and then savings will increase $500 annually. [Year 2 savings will be $3,500, Year 3 savings will be $4,000 and so on] Interest at 7%, which device should the firm purchase? 1. Use IRR and show the sequence of alternatives being assessed 2. Use ERR and show the sequence of alternatives being assessed
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
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The CTO of a pharmaceutical firm will install one of two mechanical devices to reduce costs. Both devices have useful lives of 5 years and no salvage value.
Device A cost: $10,000
- Expected to result in $3,000 savings annually.
Device B cost: $13,285
- Expected to result in savings of $3,000 the first year, and then savings will increase $500 annually. [Year 2 savings will be $3,500, Year 3 savings will be $4,000 and so on]
Interest at 7%, which device should the firm purchase?
1. Use IRR and show the sequence of alternatives being assessed
2. Use ERR and show the sequence of alternatives being assessed
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