Chapter 26, Problem 40P

This problem continues the Piedmont Computer Company situation from Chapter 25. Piedmont Computer Company is considering purchasing two different types of servers. Server A will generate net cash inflows of $25,000 per year and have a zero residual value. Server A’s estimated useful life is three years, and it costs $45,000.

Server B will generate net cash inflows of $25,000 in year 1, $15,000 in year 2, and $5,000 in year 3. Server B has a $5,000 residual value and an estimated useful life of three years. Server B also costs $45,000. Piedmont Computer Company’s required rate of return is 14%.

Requirements

1. 1. Calculate payback, accounting rate of return, net present value, and internal rate of return for both server investments. Use Microsoft Excel to calculate NPV and IRR.
2. 2. Assuming capital rationing applies, which server should Piedmont Computer Company invest in?